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Cryptocurrency RegulationGuide

Understanding Cryptocurrency Compliance

Cryptocurrency has arrived as the savior of the financial industry and has become popular largely because of the value it provides us with. Developments in the crypto world are currently being monitored by banks, businesses, and individuals around the globe. Just because cryptocurrency is becoming the new normal these days and more people are accepting it than ever before, it is about time that we start focusing on cryptocurrency compliance as a crucial thing.

Crypto compliance is important because of the widespread popularity and volume of the crypto marketplace. Without any regulations, a huge market like this can cause lots of problems.

In this article, we’ll discuss the possible effects of crypto compliance on the market’s future. We’ll also learn about the best ways to regulate the crypto market.

Why is Crypto Compliance Important?

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The cryptocurrency market has seen unprecedented growth in recent years. In 2021 alone, the volume of the crypto market transactions amounted to around $16 trillion. However, this progress also included an inflated number of illegal transactions.

The volume of illegal transactions was around $15 billion in 2021. This is the main reason why many companies and governments are focusing on crypto compliance. By inviting regulators to regulate this huge market, we can minimize the number of illegal transactions every year.

Illegal activities can easily be traced and mitigated by regulators when new and stronger regulations are put in place. Once illegal transactions are dealt with, there’ll be fewer concerns regarding money laundering, tax evasion, prohibited goods, and terror financing, which is currently done by using the unregulated crypto market.

Definition

When you’re learning about the crypto market and compliance, you must learn the definition of crypto compliance as well. Since the volume of illegal transactions has increased significantly in recent years, it has made the introduction of compliance measures necessary. These regulations can also prove to be helpful in keeping every user in the cryptocurrency marketplace away from fraud and illegal activities.

Specifically, anti-money laundering measures are some of the most important points. We must follow in order to regulate the crypto market properly. These measures will help us keep the crypto market safe from any type of illegal activity.

There are three main parts to the whole crypto compliance process. These include KYT, KYC, and KYB.

Anti-money laundering standards can be used by individuals and businesses around the globe to scan for potential illegal transactions and fraudulent people. Every user is verified against the anti-money-laundering regulations with the help of KYT, KYC, and KYB standards. When every user on the cryptocurrency marketplace is totally verified, it will significantly improve the number of trust people and institutions have in the market.

The Concept of Crypto Compliance

You will have to understand the concept of key components of the cryptocurrency market in order to understand why crypto compliance is so important. Let’s discuss more KYT, KYC, and KYB, which are the main pillars of cryptocurrency compliance.

KYT means knowing your transaction. It helps us focus on every transaction detail done on the blockchain. It also helps us understand how a transaction can be illegal or even remotely connected to illegal activities. Any type of suspicious behavior in crypto transactions of a company can easily be detected by this algorithm. Artificial intelligence allows this process to improve in the long run by learning from its own mistakes and shortcomings.

KYC means to know your customer. This is also used in traditional banking in order to identify and verify a customer before letting them use a specific financial platform. This system focuses on collecting the personal financial information of a customer, which can always be identified. Moreover, background checks can be done by financial institutions to make sure that a person is not indulging in any type of illegal financial activity.

KYB means to know your business. This process is just like KYC but focuses on identifying businesses instead. This is used by financial institutions to verify any type of business looking to use their platform. This system can also determine the legal status of a business by tracing its transactions and looking for any type of illegal activity.

These were the three pillars of AML, or anti-money laundering compliance, which is a must in today’s crypto market. With the help of these three processes, we can easily track illegal transactions and prevent suspicious businesses and individuals from achieving their illegal goals.

All three methods can be used together in order to trace illegal transactions, identify fraudulent people, and freeze their assets, even on the Blockchain.

Necessary Regulations

Every financial institution and individual around the globe is pressing the need for necessary cryptocurrency compliance these days. That is because the huge and unregulated crypto market can cause some serious financial troubles around the globe if it is not properly regulated by the authorities. However, in order to implement any type of regulations, we must first introduce them and see if they will actually be helpful for the cryptocurrency market or not.

In the case of the cryptocurrency market, regulatory authorities must form new sets of regulations since this market is way different from other traditional financial markets.

Here are some of the best-suggested regulations which should be implemented in the cryptocurrency market.

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SEC

Since the securities exchange commission has legalized cryptocurrency and deals in almost every matter related to the market, they are one of the biggest stakeholders in cryptocurrency regulations as well. The SEC is already working on making useful regulations to regulate the crypto market and make cryptocurrency exchanges more secure than ever before. They’re also thinking of joining hands with CFTC in order to get new ideas to regulate the crypto market.

OCC

OCC or Options Clearing Corporation is also playing an important role in crypto regulation. In 2021, they allowed every financial institution and bank around the globe to connect their systems with Blockchain technology in order to process transactions.

FinCEN

The Financial Crimes Enforcement Network considers crypto businesses as money service businesses. Therefore, these businesses are subjected to the same regulations as other financial service companies. They require every cryptocurrency-related business to comply with anti-money laundering laws in order to get their FinCEN license. They also make cryptocurrency businesses keep a record of all of their transactions and require them to submit timely reports to relevant authorities.

CFTC

This commission classifies cryptocurrency as a commodity. They’ve also urged the need to make stronger laws and regulations regarding the largely unregulated crypto market.

OFAC

OFAC deals with foreign assets and considers crypto as fiat currency. This practically means that crypto will be regulated under the same laws as fiat currencies. They also make a list of identified crypto addresses and attach them with the identities of the users to ensure regulatory compliance. They even make a specific list to ensure seamless regulation.

Recently Introduced Regulations

With all these developments in the field of crypto compliance, you might also be curious about the new regulatory systems introduced in the market and how they might impact the crypto market.

Here are some regulations that have recently been introduced in the crypto market.

Recently in 2022, G7 countries agreed to introduce more regulations in the crypto market.

Japan is also making necessary changes in its Foreign Exchange laws to accommodate cryptocurrency and make it easier for its banks to deal with the new digital asset class.

However, strict regulations can also cause the downfall of the cryptocurrency market. For example, regulatory authorities are notorious for banning cryptocurrency for the slightest of reasons. A good example, in this case, is China, which banned cryptocurrency mining and transactions in 2021. They also forced all of their companies to withdraw from any cryptocurrency-related development and transactions.

The Importance of Compliance

Because of all the reasons mentioned above, cryptocurrency and related regulations are the need of the hour. However, even with the current regulations in place, the crypto market is still prone to hacking attempts and frauds. Exchanges dealing with cryptocurrency around the globe have introduced their own security measures, including but not limited to 2FA, regulated custodians, and penetration checks. Even then, modern hackers succeed in coming up with nasty tricks to deprive cryptocurrency investors of their money.

Moreover, hackers and fraudsters are now focusing on the DeFi market since stealing money is way easier by introducing DeFi projects. These projects are almost impossible to trace because of the anonymous nature of Cryptocurrency and Blockchain. In Q1 of 2022 alone, hackers have successfully stolen around $1.3 billion from crypto exchanges and individuals. In the whole financial year of 2021, this loss was $3.2 billion. This is another strong reason why cryptocurrency regulation is a need of the other.

The Role of Companies in Crypto Compliance

Many organizations providing anti-money laundering services to other companies have emerged in recent times. Different companies are identified according to the type of AML measures they provide. You can easily classify the whole list of companies providing these services based on the type of regulation they offer.

In order to ensure compliance in the cryptocurrency market, we must include cryptocurrency exchanges, custodians, and digital wallets supporting cryptocurrency transactions. The reason for the inclusion of these companies in the crypto compliance list lies in the fact that they deal with a huge chunk of all the crypto transactions done every year. So, all the anti-money laundering laws and regulations must apply to these companies to make sure that there are little to no illegal activities on their platforms.

You need to sign into your account on a cryptocurrency exchange if you want to buy any type of crypto. Moreover, you will need a crypto wallet to store all of your crypto assets. Custodians, on the other hand, hold on to the crypto assets of individuals and large-scale investors. They charge a specific fee for the services they provide.

Here is a brief list of companies that can benefit a lot from crypto compliance.

  • Chainalysis
  • Zero Tolerance
  • KYC Chain
  • Unblock Analysis
  • Merkle Science

These companies can provide crypto-related businesses with services like identity management and anti-money laundering technology. Crypto trade is also being made simple even with the inclusion of all the regulations with the help of compliance companies. Traditional financial service businesses are also joining in to provide these services.

Any crypto company can use these services to ensure crypto compliance and to make viable solutions for their customers. The DeFi market is also following suit, and more compliance measures are being introduced in that market as well.

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How to Ensure Cryptocurrency Compliance?

Just understanding, the definition of cryptocurrency compliance is not enough to make you eligible to ensure it for your company. You must also understand how you can ensure cryptocurrency compliance for your company with the best tips and practices. More companies than ever are working to introduce regulations and laws regarding cryptocurrency.

Here are some of the best practices every company can follow to ensure cryptocurrency compliance.

Assess the Risks

When a company goes through a risk assessment, it can easily implement the required Cryptocurrency compliance measures for its customers. These companies can ensure compliance by regulating their onboarding process, monitoring their transactions, and getting more aware of the regulatory measures they need to comply with. Even after initial compliance measures, the company must do risk assessment periodically and introduce more regulatory measures with time.

Whenever a new customer tries to register with a crypto firm, they should be able to run a comprehensive identity check on their customer in order to identify him and satisfy the KYC rules.

Companies should also introduce proper measures to trace transactions and keep data about them. This helps in tracing the flow of cryptocurrency assets across the market.

Crypto companies should also understand the regulatory requirements from regulatory bodies. They should also be able to implement all the regulatory measures required by their government ahead of time to avoid penalties.

Automated risk assessment is another feature crypto companies should focus on. This will help them immensely in accepting or rejecting new cryptocurrencies in the future.

Risk assessment is an ongoing process rather than a one-off process. That’s why crypto companies should run periodic risk assessments to identify potential risks and introduce regulatory measures to eliminate those risks.

Make a Good Team

Even after you have implemented all the compliance measures for your crypto company, you won’t be able to enjoy the benefits unless you make a good team. Your compliance officers must have enough skills to identify all the anti-money laundering red flags. They must check all of your financial processes for compliance risks and should help in introducing the right compliance measures.

Understanding Criminal Terms

Another way to know the importance of crypto compliance is knowing all the criminal terminologies and learning how to mitigate criminal activities in your crypto company. You must learn more about criminal terminologies like money mules, NFT theft, layering, and many more.

Dusting includes tons of microtransactions done by money launderers. These transactions create lots of red flags related to money laundering and cause monitoring systems to stop functioning due to a large number of requests.

Money launderers can also perform money-laundering by making transactions off the blockchain. This enables them to use the unregulated territory to accomplish their fishy goals.

Hackers can also try to steal your digital wallet, which contains all of your NFT assets. This can especially happen to independent digital wallets which don’t use the blockchain and crypto technology. Verifying the ownership of such wallets is very difficult.

Stolen cryptocurrency is usually converted into privacy coins, which can be used to buy illegal stuff on the dark web.

Scammers can also use fishy techniques to steal NFTs from your wallet. These stolen digital assets are then laundered from the primary account in the form of several micro-transactions to avoid ringing any bells.

Cybercriminals can also manipulate third persons to make transactions on their behalf. This way, they can easily avoid identity verification problems.

Layering can also be used by cybercriminals to move stolen crypto across different exchanges by exchanging them into another form of crypto. They might also mix the crypto even further by exchanging it for fiat currency in order to make it even more difficult for authorities to trace them.

Integrating Technology

One of the most important steps in ensuring crypto compliance in your cryptocurrency business is how the technology related to compliance would be integrated into your business. Making the compliance process automated with the help of software can help improve the accuracy and efficiency of compliance measures, as well as their speed of implementation.

Conclusion

A close analysis of the crypto market shows us how important crypto-related regulations have become. That’s because hacking, money laundering, and other activities are increasing considerably in the crypto marketplace.

However, regulating the crypto market won’t be possible unless every company plays its role in implementing the regulatory measures.


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Hassan Mehmood (Saudi Arabia)

Hassan is currently working as a news reporter for Tokenhell. He is a professional content writer with 2 years of experience. He has a degree in journalism.

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