Digital Currency Legal and Regulatory Obligations. How Crypto Companies Prepare! New Wave Cryptocurrency Regulations and Compliance Coming!

5 min read

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.”

‍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.  

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. Here, our panel of experts weighs 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 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.” 

‍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 cannot 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 the topic cannot be escaped despite significant uncertainty around crypto. Concerning 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 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.” 

  • 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 likely continue and bring further regulatory certainty to the financial markets.” 

‍The public appetite for digital currency has been accelerating 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, 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.

‍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 related compliance programs. This can help to grow the cryptocurrency ecosystem responsibly.”

‍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 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. 

‍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 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 differ based on the country; therefore, the provider’s output may vary. It may not be consistent with your local requirements in the worst-case scenario. 

‍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 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 the Biden Administration’s Executive Order recently 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 several reports and proposed legislative fixes, but these will take time to implement. We have also seen the Financial Action Task Force provide 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.

‍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.



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