Cryptocurrency companies are playing catch-up to other financial services providers in complying with Anti-Money Laundering (AML), Know Your Customer (KYC) and other regulations. While banks and other financial entities have had years to build their compliance programs, cryptocurrency regulations are much more recent, leaving exchanges to often build compliance procedures on the fly.
With global regulatory requirements and innovative opportunities creating a constantly shifting environment, how can cryptocurrency companies keep up? How can they create strategies and processes that can adapt quickly and help build robust and scalable organizations?
No clear cryptocurrency regulatory model
Regulatory clarity for cryptocurrency has been slow to develop because the industry is global, technologically complex and covers numerous use cases. On top of that, the industry’s rapid development has made it difficult for regulators to keep up.
Crypto describes the entire industry, but only some virtual assets are cryptocurrencies. Beyond those assets are utility, security, exchange, governance, privacy, asset-backed and non-fungible tokens (NFTs), as well as stablecoins, decentralized finance (DeFi) and distributed autonomous organizations. Each token class has a function, application or use case, and each has a unique code and business structure, which affects how to classify them legally.
Should a particular token be under security laws or treated as a commodity? What regulatory agency should oversee what aspect of the industry? What applicable laws are in place? What new requirements will help protect the public and financial system and allow the industry to prosper?
Each jurisdiction has different philosophies, models, processes, capabilities and biases regarding crypto, from outright bans to having it as legal tender. The November 2021 U.S. Library of Congress Regulation of Cryptocurrency Around the World report provides an overview of regulations:
- Jurisdictions with an absolute ban: 9
- Jurisdictions with an implicit ban: 42
- Jurisdictions with an application of tax and/or AML laws: 103
Developing cryptocurrency regulatory frameworks
The lack of clear and specific crypto laws is often balanced by compliance requirements based on rulings, guidance and clarifications of existing laws and regulations. Virtual asset service providers (VASPs) are generally under the same regulatory expectations as other financial services to have:
- A robust AML program
- Strict onboarding and ongoing KYC procedures
- Up-to-date and accurate watchlist screening processes
- Appropriate money transmission and other licenses that match jurisdictional and service offering requirements
- Adequate controls to ensure security, privacy and operational integrity, including legal, accounting, customer service and liquidity management
- Account and activity monitoring, investigation and reporting abilities
VASPs can consider those baseline requirements. But strict licensing requirements are becoming more prevalent, and there are more complex regulatory initiatives on the horizon.
The Financial Action Task Force (FATF) has recommended the so-called travel rule that would require “obligations to obtain, hold, and transmit required originator and beneficiary information in order to identify and report suspicious transactions, monitor the availability of information, take freezing actions, and prohibit transactions with designated persons and entities.”
In the U.S., the Financial Crimes Enforcement Network ruled the existing travel rule requirements apply to cryptocurrency exchanges. On February 16, 2022, 18 VASPs unveiled the Travel Rule Universal Solution Technology (TRUST) as one solution to comply with the requirement. The FATF recommends the provision and there are now appropriate solutions, but there’s anticipation the requirement will become a standard VASP obligation.
Preparing for the next wave of opportunities
Organizations scanning the horizon can see many possibilities for innovations and regulations.
Crypto initiatives could change the way people view central bank digital currencies, what it means to be a bank, fractionalized investments, investment models based on staking and lending, and payment systems. Other Web 3.0 opportunities, such as the metaverse, also could hold opportunities for crypto.
I think cryptocurrencies will become the coin of the realm for the metaverse,” Hal Lonas, Trulioo chief technology officer, told PYMNTS.com. “It just makes sense. And all those same concerns (of financial crime) will travel with crypto into the metaverse.
That potential scale of change has JP Morgan considering bringing trillions of dollars of assets into DeFi, and McKinsey Insights suggested the metaverse might generate up to $5 trillion in value by 2030.
Getting in front of regulations and creating solutions that align with legal requirements will help drive insights and create workable standards. That can start with considering a U.S. executive order’s priorities in developing a coordinated approach to crypto:
- Provide consumer and investor protection
- Ensure financial stability
- Prevent illicit finance
- Drive national leadership in the global financial system and economic competitiveness
- Enable financial inclusion
- Promote responsible innovation
The race is on to create a new global economic system with crypto at its core. The regulations are still in development, but the organizations that can adapt quickly to emerging standards can gain a competitive edge in the evolving crypto market.
Optimize Your Crypto Onboarding
Safety First: How Identity Verification Strengthens Customer Trust in the Evolving Crypto World
Featured Blog Posts
Business Verification (KYB)Enhanced Due Diligence Procedures for High-Risk Customers
Identity VerificationProof of Address — Quickly and Accurately Verify Addresses
Business Verification (KYB)How to Verify Legitimate Businesses and Merchants