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 the idea of crypto regulation and accept that not all crypto is “criminal money.”
This attitude shift is a sign of progress. But what does this mean for the future, and how can crypto companies be prepared for what’s to come concerning regulation and compliance?
To answer these questions, we’ve engaged several industry-leading voices to provide insights into current regulation trends, the benefits of the new wave of crypto compliance, and what the future may hold for crypto companies looking to grow and scale.
Let’s dive in.
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 back in 2008. However, not too long ago, crypto got a bad reputation for being a go-to method for financial crime financing. Here, our panel of experts weigh in on what they perceive to be some of the most exciting shifts in crypto regulations.
Representing Capitol Peak Strategies, Founder and Principal Alex Zerden notes 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.”
These mindset adjustments signify a growing awareness that crypto is not all bad anymore, and there are ways that it can be successfully managed at the government level.
To that effect, Clark Flynt-Barr, Senior Policy Advisor at Chainalysis, comments that “policymakers are increasingly engaged on the issue of cryptocurrency regulation, and their thinking 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 they interact with their customers, and what sorts of guardrails might be appropriate to ensure that illicit actors are not able to exploit cryptocurrency in criminal activities.”
Now that the novelty has worn off and governments realize that cryptocurrencies aren’t going anywhere, it has become a key point of interest to apply the same oversight and controls over these digital assets as governments would for traditional financial institutions.
Finally, Maxim Kon, CEO at Cheksy, echos that despite there still being a significant level of uncertainty around crypto, the topic cannot be escaped. With regard to compliance, he notes three significant shifts to keep an eye on:
- More regulatory activity. “In most countries, politicians and regulators are talking about crypto. There is still a lot of uncertainty and a lack of education around the topic, however, the topic of crypto is everywhere.”
- Central Bank Digital Currencies. “The emergence 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.”
- Nation-States Adopting Crypto as a Legal Tender. “We’ve recently witnessed the trend of various regions, such as El Salvador, Prospera, Honduras, Madeira, and the Central African Republic approving Bitcoin as a legal tender. This trend will most likely continue and bring further regulatory certainty to the financial markets.”
The public appetite for digital currency has been accelerating, primarily due to the pandemic. But we are entering territory that is still largely uncharted. Even though there have been strides to normalize crypto as a mainstream form of legal tender, there are still many unanswered questions 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 a level of safety and security, making crypto more accessible for those who otherwise would avoid the risks related to its adoption.
Along this same vein, Flynt-Barr notes that “the benefits of cryptocurrency regulation are that - if the regulations are workable and appropriate - this will provide market clarity to some participants who have been reluctant to enter the space. It will ensure they understand who their regulators are and what regulatory obligations they have so that they can design corresponding compliance programs. This can help to grow the cryptocurrency ecosystem in a responsible manner.”
How to Build a Future-Proofed Crypto Compliance Program
As we enter the next phase of crypto industry maturity, it has become clear that building crypto compliance programs that offer substantial forms of protection without a pre-defined roadmap for success is one of the most significant challenges these organizations face. In many cases, this means leveraging third-party solutions that fit into your risk and compliance infastructure.
“Most crypto companies operate on unique business models with very little precedent in terms of 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 in order 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.
And Chainalysis’ Clark Flynt-Barr goes into detail about how crypto companies can take a risk-based approach to get where they need to be:
“They must assess and understand where they are coming up against risks, understand those risks, and how they can mitigate them. What this process looks like may evolve as the different technologies and players in this ecosystem change.
Under the current AML/CFT framework, blockchain forensics tools and transaction monitoring tools serve as a powerful method for exchanges to look at their customers’ exposure to illicit services, understand when they are trying to cash out on an illegal service, and be able to 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.
“Many providers of blockchain risk analytics data are available. When selecting your provider, several factors should be assessed. First of all, the jurisdiction of the provider. The laws, regulations, and sanctions are different based on the country, and therefore also, the provider’s output may differ, and in the worst-case scenario, it may not be consistent with your local requirements.
The rating methodology and the team size and experience of the provider should be looked at. 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. If the price is not an issue, multiple providers should be connected to get comprehensive results. Alternatively, aggregating services or external specialists with access to various systems can be tasked with analyzing blockchain risk on your behalf.”
The Future of Crypto Regulation: Predictions and Final Thoughts
Near term, crypto regulation will continue to present many questions. But based on what we’ve heard here, it is clear that this is a priority.
“We have seen recently the Biden Administration’s Executive Order on Digital Assets, which is prompting different US agencies to examine this space more closely, understand where it falls under their remit and how they can approach crypto in a more unified way,” notes Flynt-Barr.
“This EO will result in a number of reports and proposed legislative fixes, but these will take time to implement. We have also seen the Financial Action Task Force put out updated guidance on virtual assets and virtual asset 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.
While no one can predict the future with 100% certainty, we appreciate our partners’ views to help shine some light on the knowns and unknowns facing the industry as we head into a new era of crypto market clarity.
A special thank you to Brandi Reynolds, Maxim Kon, Clark Flynt-Barr, and Alex Zerden for sharing your insights.