NEW YORK (Reuters) - As major financial institutions weave themselves deeper into the patchwork of cryptocurrency trading, they are trying to figure out how to handle conflicts that could arise when employees trade digital coins in their personal accounts.
Until recently, banks, brokerages and exchanges had largely steered clear of the crypto-craze, even as they invested in blockchain, the technology that underpins No. 1 digital currency bitcoin, in hopes that they could use it for other types of transactions.
But soaring prices of digital coins has piqued investor interest, and banks including Goldman Sachs Group Inc and Morgan Stanley have been exploring how to clear trades, while derivatives exchanges CBOE Global Markets Inc and CME Group Inc have launched bitcoin futures.
As trading in virtual currencies moves to the mainstream, compliance departments are paying closer attention, securities lawyers and former employees said.
“We have seen companies asking for help with compliance policies around cryptocurrencies as there is a real danger of insider trading and front-running,” said Gregory Kaufman, a partner at law firm Eversheds Sutherland.
“There might be a feeling by employees that ‘I can do it and my employer won’t find out’ because of the pseudo-anonymous nature of cryptocurrencies.”
Conflicts could arise if employees involved with cryptocurrency and blockchain projects, or who simply want to invest in them, place bets with an unfair advantage, lawyers and bank employees who spoke to Reuters said.
Employees are generally required to get clearance before trading in any securities that could represent a conflict of interest. Firms monitor employees’ holdings by getting reports on their personal accounts from brokers.
Those policies would be difficult to enforce with cryptocurrencies - digital tokens that use encryption techniques to secure transactions.
Trades are done through a fragmented network of exchanges, sometimes anonymously, making them complicated to track, and employees who work with blockchain could have holdings that represent conflicts, experts said.
“I would question how you could work in this technology if you haven’t at least played around with the cryptocurrencies,” said Colin Platt, a technology consultant who worked in blockchain at BNP Paribas until 2015.
No incidents of cryptocurrency insider trading at banks have publicly emerged to date. But the risk of conflicts can be seen in how prices surge when large financial firms announce their involvement with digital coins.
Zcash soared as much as 129 percent in a day last May when JPMorgan Chase & Co said it would use the technology behind the cryptocurrency. Partnerships between large financial firms and projects including ethereum and Ripple - the No.2 and No. 3 virtual currencies - have sparked similar rallies.
JPMorgan does not have specific rules on potential conflicts of interests involving cryptocurrencies, spokesman Patrick Burton said. Instead, its compliance department has determined that existing insider trading rules would apply.
“We prohibit transacting on the basis of material non-public information, and dealings that create actual or perceived conflicts of interest,” Burton said, noting that the rules were in place at the time of the Zcash partnership, preventing employees close to the deal from trading the token.
Banks including Goldman, Banco Santander, Wells Fargo & Co, the Royal Bank of Scotland Plc and Standard Chartered Plc have taken a similar stance. Citigroup Inc and Morgan Stanley require employees to adhere to their code of conduct but are still examining how to treat employees’ crypto-investments, representatives and people familiar with their policies said.
There is also an absence of clear rules from global regulators, making it harder for financial companies to set their own. The U.S. Commodity Futures Trading Commission considers bitcoin a commodity, while the U.S. Securities and Exchange Commission says some cryptocurrencies may be securities without specifying which ones.
Global regulators have been rattled by last year’s explosive growth and subsequent fall in the value of bitcoin and other digital currencies and tough regulations could be on the way.
“For many firms it’s simply easiest to have a policy not to let their employees trade any personal cryptocurrencies or tokens,” said Ben Kozinn, a partner at Lowenstein Sandler LLP, who is working with financial clients grappling with how to treat the issue as regulations evolve.
From the end of February, the Nordic’s largest lender Nordea Bank AB will ban staff from trading cryptocurrencies.
Switzerland’s UBS Group AG does not consider cryptocurrencies to be securities and employees are not required to disclose holdings or get clearance, according to a staff memo this month. That could change as regulations change, it said.
Reporting by Anna Irrera; Additional reporting by Michelle Price and Lawrence White; Editing by Lauren Tara LaCapra and Susan Thomas