How crypto companies can improve compliance

Since its relatively recent inception, the cryptocurrency world has been described by some as the ‘wild west’.

With little or insufficient regulation, bad actors were able to fleece unsuspecting investors of their hard earned money, often with few consequences.

Fortunes were made and fortunes were lost.

But times are changing and regulators around the world are starting to catch up with the fast-moving technology.

In 2023, it is now crucial for crypto and other blockchain companies to play by the now more clearly defined rules.

In this post, we’ll detail how the current regulations are being enforced and which areas your organisation needs to focus on to remain compliant.

Crypto compliance cases

We don’t need to look too far to find prime examples of how regulators have cracked down on blockchain companies.

Among many cases in recent times, there were two very powerful, high-profile players paid the price for failing to stick to the rules.

• • Coinbase
    

    In January of 2023, it emerged that prominent cryptocurrency exchange Coinbase had reached a US$100 million settlement with the New York Department of Financial Services over long standing failures in its anti-money laundering program.As part of the agreement, Coinbase was ordered to pay a $50 million fine and invest a further $50 million in compliance efforts.

    The company, which is the only publicly traded cryptocurrency exchange in the United States, released a statement promising to rectify the issues identified.

    “Despite the prevailing notion that crypto companies don’t want to be regulated, many if not most companies have been working with policymakers for years,” Coinbase CEO Brian Armstrong told CNBC.

• • FTX
    

    Far more public and far more severe than the Coinbase action was that taken against another crypto exchange, FTX.The company’s founder, Sam Bankman-Fried was arrested in the Bahamas and charged with multiple fraud offences, after its disastrous collapse late in 2022.

    So far, investigations have been carried out by the Royal Bahamas Police Force and the United States Attorney for the Southern District of New York.

    According to the Wall Street Journal, FTX had allegedly lent $10 billion from customers’ accounts to fund Alameda Research earlier in 2022, which was a move forbidden by FTX’s terms of service.

Both examples not only show that regulators now have crypto companies ‘in the gun’, but the fallout has increased the pressure to further improve protections for vulnerable consumers.

What are regulators focussing on?

As the mainstream adoption of cryptocurrencies advance, governments around the world will continue developing regulatory frameworks.

Now they appear to be focussing their attention on the following areas:

 

Know Your Customer (KYC)

Regulators are focused on KYC in the cryptocurrency industry because it helps them to prevent many illegal activities, including terrorist financing and tax evasion. Ensuring you comply with KYC obligations will help your company build trust and legitimacy.

Anti Money Laundering (AML)

Cryptocurrency transactions are often anonymous and decentralized, which can make it difficult for law enforcement and regulatory authorities to track and identify suspicious activity. AML regulations help to address this issue by requiring companies to implement measures such as KYC checks, transaction monitoring and suspicious activity monitoring.

Taxation compliance

Failure to comply with tax laws can result in significant fines and penalties and can also damage a company’s reputation and credibility. Governments are becoming better at policing tax evasion and it’s no longer acceptable for companies to plead ignorance if they’re caught.

How to comply with regulations

All companies should be looking to implement compliance and risk management strategies that ensure a smooth year in 2023 and beyond.

Below are three tips to ensure your organisation is prepared:
 

1. Use a ‘regulatory sandbox’
   A good way to test new products, services or products is to use a regulatory sandbox, which is a framework that allows such testing in a controlled environment. The goal of a regulatory sandbox is to provide a safe and flexible space for companies to experiment and innovate, while also ensuring that the interest of consumers and the broader public are protected. The exact structure and rules of a regulatory sandbox can vary depending on the regulatory authority and the industry.
2. Self-regulate
   The best way to avoid the wrath of government regulators is to set up systems that ensure your company is adhering to industry standards and best practice. This can be done by engaging external consultants who can implement internal compliance programs that are robust and transparent. Companies that engage in self-regulation demonstrate their commitment to integrity and security.
3. Migrate to a regulated coin
   If your project uses a token or cryptocurrency, it could pay to migrate to a regulated model which features improved infrastructure that ensures security and compliance. It might sound scary, but this can be a chance to solve many problems and future-proof your operation. It could even provide the opportunity for a new raise or coin offering.

Changing the mindset about crypto regulation

Many innovators push against the idea of regulation, fearing that it will draw the crypto, blockchain and Web3 world back in to a centralised world limited by government red tape.

However regulation, when done right, can set the stage for sustainable growth and credibility, while also protecting consumers and businesses.

Instead of seeing investing in regulation as a limitation, see it as an opportunity. The crack down from regulators gives business leaders the chance to ‘clean house’, streamline operations and bring in new protections and levels of transparency that will ultimately serve your long term goals.

Adapt to crypto regulation with help from the experts

As regulatory requirements continue to evolve, it can be difficult for your company to keep up.

The constant pressure to remain compliant can be extremely challenging and staying ahead of the curve can often feel impossible.

Rewired.one works with crypto and blockchain companies, as well as their legal and accounting teams, to develop and execute compliance strategies that set companies up for long-term, sustainable success.

Want to know your next step in crypto compliance?

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