Until recently, the cryptocurrency world was a wild wild west for regulators. However, as the industry has matured, there has been a marked change in perspective where policymakers are now much more engaged with crypto regulation and accept that not all crypto is “criminal money.”
The crypto industry needs some regulation. The sector is currently overseen by a patchwork of federal and state laws, which haven't continuously evolved as quickly as the technology has. New cryptocurrencies are born by the hour — and along with them, plenty of scams and fraud.
Until recently, the cryptocurrency world was a wild wild west for regulators. However, as the industry has matured, there has been a marked change in perspective where policymakers are now much more engaged with crypto regulation and accept that not all crypto is "criminal money."
What does this mean for the future?
The Evolution of Crypto Regulation
A lot has changed since Satoshi Nakamoto posted his research paper outlining a new digital currency referred to as Bitcoin in 2008. However, not too long ago, crypto got a bad reputation for becoming a go-to financial crime financing method.
Representing Capitol Peak Strategies, Founder and Principal Alex Zerden note that they "have been impressed with the change in perspective from the industry to recognize the importance of meeting or exceeding existing legal and regulatory obligations, especially on AML/CFT and sanctions compliance."
To that effect, Clark Flynt-Barr, Senior Policy Advisor at Chainalysis, comments that "policymakers are increasingly engaged on the issue of cryptocurrency regulation. Reasoning has evolved from 'this is all criminal money - let's put a stop to this to a much more nuanced examination of who the players are in this ecosystem. How interaction is done with customers, and what sorts of guardrails might be appropriate to ensure that illicit actors cannot exploit cryptocurrency in criminal activities."
More regulatory activity. "In most countries, politicians and regulators are talking about crypto. There is still much uncertainty and a lack of education around the topic. However, the topic of crypto is everywhere."
Central Bank Digital Currencies. "The emergence of Central Bank Digital Currencies (CBDCs) could start a new era of efficient, low-cost digital payments from everywhere in the world without the price volatility of decentralized digital currencies such as Bitcoin. At the same time, CBDCs are opening Pandora's Box of surveillance, control, and privacy concerns over people's transactions and financial freedom."
The public appetite for digital currency has been accelerating due to the pandemic. Entering territory that is still largely uncharted. Even though there have been strides to normalize crypto as a mainstream form of legal tender, many unanswered questions remain about the future.
Benefits of Increased Regulatory Measures
While crypto has traditionally been coveted by many for the anonymity associated with its use, there is a perception that more regulation is a good thing for the industry's longevity.
Zerden explains that "the entire digital asset ecosystem benefits from regulation by creating a fair and level playing field to promote responsible innovation while addressing key policy objectives like countering illicit finance, investor/consumer protection, market integrity, and other priorities."
In essence, regulation brings safety and security, making crypto more accessible for those who otherwise would avoid the risks related to its adoption.
How to Build a Future-Proofed Crypto Compliance Program
It has become clear that building crypto compliance programs that offer substantial forms of protection without a pre-defined roadmap for success are one of the most significant challenges these organizations face.
"Most crypto companies operate on unique business models with minimal precedent in regulatory compliance. As such, a crypto AML program can't be designed as an 'off the shelf' document, and it is going to require a significant amount of 'outside the box thinking to be best suited to a given firm's needs," Brandi Reynolds, Managing Director of the Bates Group explains.
So how can an emerging industry build a future-proofed system for compliance?
Reynolds advises that crypto firms should take a proactive approach in managing their relationships with their regulators, including reaching out to regulators before starting a business to understand the necessary compliance requirements beforehand.
Under the current AML/CFT framework, blockchain forensics and transaction monitoring tools are a powerful method for exchanges to look at customers' exposure to illicit services, understand when to cash out on an illegal service, and address and mitigate these risks. accordingly."
Crypto Compliance Tools
It is clear then that the future of crypto regulations and the success of crypto compliance programs will be heavily influenced by the tools and technology used to bolster these systems.
"There needs to be a recognition that compliance is dynamic so that companies and projects will continue to refine their approaches to risk, using both new frameworks, data, and tools to address existing and emerging risks," says Zerden of Capitol Peak Strategies.
And Cheksy's Maxim Kon recommends that crypto companies leverage the technology and the information available on the blockchain for robust compliance monitoring.
The rating methodology, team size, and provider experience should be examined. Each provider has a specific approach to classifying and transferring the risk of each wallet.
Last but not least, the variety of coins and tokens offered and the level of detail of each provider should be compared. Multiple providers should be connected to get comprehensive results if the price is not an issue. Alternatively, aggregating services or external specialists with access to various systems can be tasked with analyzing blockchain risk."
The Future of Crypto Regulation: Predictions and Final Thoughts
Near term, crypto regulation will continue to present many questions. It is a priority.
" Financial Action Task Force provides updated guidance on virtual assets and service providers, providing additional clarity on their recommendations for regulating this space. This guidance put a greater focus on certain players in the DeFi space, as well as NFTs, and emphasizes the need for jurisdictions to implement the Travel Rule for cryptocurrency businesses."
Ultimately, Flynt-Barr's hope for long-term outcomes is that with less ambiguity, regulators will be able to consider the nuances of the ecosystem and recognize where more obligations may be necessary and where they are not needed.
The industry heads into a new era of crypto market clarity.
