How Does the Encryption Debate Influence The World’s Traders?

Just when you thought the only reason to pay attention to the encryption debates taking place in the media had to do either with (a) discussions about how terrorists communicate or (b) debates about how journalists work with sources for big scandals such as The Panama Papers or WikiLeaks, a recent financial services story in Bloomberg reminds us of yet another reason why it’s important that we all understand the nuances of encryption.

What most traders inherently know – and what most mainstream observers of financial services may not realize – is just how easy it is to circumvent the rules and regulations that have been put into place to guard against market abuse or ​insider trading. Here is some context:

• Industry Peer Pressure: As Laura J. Keller points out in her Bloomberg article, there appears to be significant social pressure not to ignore messages that come from colleagues, former colleagues, and others with whom one works in the same industry: “Some clients also prefer those [new types of] apps to communicate. Ignoring those messages would be bad for business … Many clients are friends, and vice versa.” So in essence, this situation goes beyond the core focus of an individual to a firm’s culture of compliance to something that is cross-industry.
• Smoke vs. Fire: It is crucial to remind us all that the mere use of these types of communication/messaging apps doesn’t inherently mean that someone is engaged in illicit trading behavior. However, being able to monitor those communications and to understand if a crime – or the beginnings of a crime – is being performed is something that the firms, not to mention the regulators, are simply unable to do without access to the underlying decryption protocols or user access credentials.
• Technological Capabilities vs. Corporate Desire: The technology to monitor such communications does exist and has existed for quite some time. Organizations concerned with these issues can police them if they choose to. The core debate at issue here touches on whether or not a firm has a culture of compliance and to what extent a firm feels the pressure/push from its regulators, clients, and even shareholders/owners to monitor these types of communications.
• Cops & Robbers: The article does a good job of giving context to the problem at hand. New technologies will always infiltrate the workplace; moreover, the sheer speed with which some communication technologies come into the capital markets world inherently poses huge challenges for compliance officers. Those compliance professionals must understand and wrestle with these changes from a technology, process, budgetary, training, and personnel points of view. In addition, I’d argue that many readers of the Bloomberg article – and many compliance professionals as well – probably hadn’t even heard of some of the apps mentioned in the story: WeChat, Dust, Confide, and Signal, to name a few.
   

Whether or not you’re a believer in additional compliance is beside the point. The fact of the matter is, these new technologies provide ways to out-maneuver and out-smart existing compliance rules that have been put into place to reduce financial crime. Regulators are at the forefront of these issues, and the stiff fines they are levying show they are serious about these matters. However, financial criminals are always looking for ways to work around such rules and it is reasonable to expect that they will continue to do so. Financial services organizations, their clients,​ and their regulators all need to wake up to this fact.