February 28, 2023

What Is Cryptocurrency Compliance, and Why Does It Matter?

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Crypto is great, but it needs some regulation to make it safe for all users.

The advent of cryptocurrency is widely regarded as one of the biggest game-changers in the 21st century. Its global reach and decentralized structure make it an innovative financial system with the potential to upend practices in the financial sector and give people more control over their money.

However, there is a need to tackle some concerns and challenges—one way to do so is by using cryptocurrency compliance.

What Is Cryptocurrency Compliance?

Cryptocurrency was created to combat the challenges of the traditional financial system. However, crypto isn’t perfect, and there have been numerous records of fraudulent transactions, crypto cybercrime, and illegal misuse of digital assets. As a result, governments and regulators designed cryptocurrency compliance to prevent these crimes.

Cryptocurrency compliance ensures that crypto investors and companies meet certain standards and regulations to check the activities of financial fraudsters and cyber criminals. These rules and standards are different for various crypto niches. However, the compliance standards all aim to reduce fraud across crypto.

Some of the components of cryptocurrency compliance are anti-money laundering (AML), know your business (KYB), know your customer (KYC), know your transactions (KYT), taxation, and customer due diligence (CDD).

3 Key Compliance Elements in Cryptocurrency

Here’s a review of three essential components of cryptocurrency compliance.

1. Anti-Money Laundering (AML) Regulations

In crypto, AML regulations prevent using custodian services and cryptocurrency exchanges for money laundering activities. These policies, laws, and rules hinder cyber criminals from changing unlawfully acquired crypto tokens and assets into cash.

The Financial Action Task Force (FATF) determines the global AML legislation standards. In 2014, FATF released its Updated Cryptocurrency AML Guidance [PDF]. Then, other regulatory bodies, including the European Commission and the United States Financial Crimes Enforcement Network (FinCEN), integrated most of the FATF’s AML regulations.

Cryptocurrency exchanges, decentralized finance (DeFi) protocols, stablecoin issuers, and the best NFT marketplaces enforce these AML regulations. They check, monitor, and attempt to thwart any suspicious transactions that can be linked to terrorist financing or money laundering.

These are some AML regulations:

• All cryptocurrencies must employ crypto KYC compliance in a risk-based manner. Individuals with a high-risk profile must undergo stiffer crypto KYC compliance protocols, while those with a low-risk profile can undergo lighter KYC protocols.
• Crypto exchanges have to monitor customers regularly.
• Customers cannot be politically exposed persons (PEPs).
• There must be regular screening to ensure customers don’t have international sanctions.

2. Know Your Customer

Know your customer (KYC) regulations require that centralized cryptocurrency platforms identify and verify newly registered customers. This allows the cryptocurrency institution to assess how much of a risk the customer poses in terms of financial and cybercrime. An exchange without KYC is one of the several signs of a fishy cryptocurrency platform.

During the verification process, cryptocurrency institutions collect and store users’ personally identifiable information (PII). Then, they scrutinize them to eliminate risks.

Finally, these platforms confirm the identity of the individuals on official databases with information on sanctioned individuals and politically exposed persons.

Once customers are declared risk-free, they receive access to perform activities on the crypto platform. KYC in crypto helps prevent criminal activities like money laundering, evasion of tax, and terrorist financing.

3. Know Your Business

Know your business (KYB) is a crypto compliance structure similar to KYC. The only difference is that KYC is for individuals, and KYB is for crypto businesses.

With KYB, crypto businesses legally obtain information about their clients and partners. During this process, information concerning the ultimate beneficial owner (UBO) of the business is collected, potential partners and clients are verified, and decision-makers, directors, shareholders with more than 25% of the total shares, and beneficiaries are verified during the process.

Crypto businesses are also required to verify the source of income of the business executives and owners and whether they are politically exposed persons or on a sanctions list. Typically, these businesses must also provide a detailed narration of all their activities, the average yearly and monthly turnover, and other necessary legal information.

What Regulations Govern Cryptocurrency?

Different regions in the world have their regulatory bodies. Some of the regulations are similar, while others are different. Here are a few regulations governing cryptocurrency.

Financial Crimes Enforcement Network

Because cryptocurrencies are a form of money, the Financial Crimes Enforcement Network (FinCEN) mandates that they be subject to regulations. FinCEN offers crypto service providers licenses; the network requires that they enforce AML compliance protocols and regularly keep records of events and transactions while submitting reports.

Securities and Exchange Commission

The Securities and Exchange Commission (SEC) views cryptos as cash, securities, and cash equivalents and therefore requires the registration of crypto exchanges. The SEC also mandates that individuals transacting in cryptos follow appropriate SEC regulations and securities laws.

Commodity Futures Trading Commission

The Commodity Futures Trading Commission (CFTC) considers crypto tokens as commodities just like gold and other financial products and, as such, has rules governing crypto transactions.

The Importance of Cryptocurrency Compliance

Cryptocurrency compliance benefits all stakeholders in the industry, including customers, crypto businesses, exchanges, wallets, and crypto custodians.

1. Cryptocurrency compliance has significantly reduced money laundering, terrorism financing, and other financial crimes and fraudulent activities via crypto.
2. It also decreases companies’ legal risks via the well-robust KYC due diligence protocols.
3. Cryptocurrency compliance boosts the market stability of cryptos. The crypto market can change with news of anonymous and criminal transactions, affecting the prices of crypto assets.
4. Cryptocurrency compliance provides a clearer picture of the sales and purchases of cryptos.
5. Given the massive daily volumes of transactions, cryptocurrency compliance facilitates seamless operations.

Challenges in Achieving Cryptocurrency Compliance

Like every evolving innovation, cryptocurrency compliance is laden with numerous challenges, including the following:

1. The available pre-existing behavior profiles of customers are insufficient. Trying to figure out individuals’ atypical and typical behavior beforehand and from scratch is very difficult.
2. The crypto industry is riddled with constantly emerging technologies and trends. This births an ever-changing need to constantly update compliance standards to mitigate money laundering and scam risks.
3. Designing legislation to fit all forms of crypto assets is difficult and time-consuming. Furthermore, different regions have different regulatory bodies, which can pose a challenge regarding differences in compliance regulations.

Crypto Compliance Is Not So Different From the Norm

The primary reason for creating cryptos was the need for decentralization and anonymity in financial transactions. Governments and traditional financial institutions control and influence how you use your money through regulations and taxation. However, the cryptosystem isn’t all perfect.

Crypto compliance seeks to address the downsides of digital assets, but it seems that the primary purpose of cryptocurrency is being defeated by crypto compliance. While trying to perfect the crypto industry, crypto compliance seeks to control and influence how you use your digital assets.

Reference: https://www.makeuseof.com/what-is-cryptocurrency-compliance/

Ref: makeuseof

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