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Crypto Needs RegTech to Ensure its Legitimacy

Crypto Needs RegTech to Ensure its Legitimacy

Over the past decade, we have seen several structural changes in KYC and AML regulations around the world. High profile cases involving money laundering and the penetration of illegal funds into global markets have forced regulation to constantly evolve in an attempt to keep up with the world.

The Wirecard scandal was a very high profile example of this. The german card payment processing company was being investigated for fraud and ended up unearthing evidence of shell companies involved in the distribution of narcotics and pornography.

At Danske Bank, over $200 billion was laundered through an Estonian subsidiary, going virtually unnoticed for years, until 2017-18.

Regulators and financial institutions have improved their understanding of financial crimes, resulting in improved AML processes, but these adjustments and improvements are always incredibly reactive.

Now, these same regulators and institutions mustn’t make the same mistakes when it comes to cryptocurrency, not only for their sake but for the sake of cryptocurrency itself.

Global adoption of cryptocurrencies have soared across low, middle and high-income countries over the last few years, and regulators worldwide are still evaluating how to address the issues posed by digital currencies.

The Global Future Council on Cryptocurrencies recently published a paper on navigating cryptocurrency regulation. They explain how past eras of innovation, like the early days of the internet, could help.

Much like the development of early internet protocols, the vast potential for cryptocurrency applications makes it challenging to apply existing regulations and frameworks. As a result, any hasty regulation could kill the openness of the cryptocurrency market and further exacerbate the digital divide between and within countries.

But time is of the essence. Cryptocurrency continues to gain momentum worldwide, but the speed of this growth is already bringing problems with it. For instance, a significantly high number of UK cryptocurrency firms have failed to meet regulations aimed at curbing money laundering, according to the Financial Code Authority.

But money laundering is not the only issue, one of cryptocurrency’s first issues was that many initial coin offerings were fraudulent in nature, and there was no way for investors to discriminate between legitimate offerings and deceptive ones.

What is needed are thorough and effective regulators; organised bodies that know the technical and economic issues that drive cryptocurrency.

Things are currently being done, though. The EU has begun to introduce more rigorous financial regulations, and many member states now regulate crypto assets individually, with Germany leading the way in being the first to regulate cryptocurrencies

While the argument against regulation has been the decentralised nature of Defi and the idea that it has led to the problems with traditional currencies that led to crypto’s creation, the right regulation will boost investor confidence and provide them with protection.

Ultimately, we need to regulate with efficacy, which means creating legislation that can be applied specifically to digital assets and will not hinder the market while still helping quash financial crimes.

The global nature of the traditional finance industry shows us the value of having an international regulatory framework for oversight within crypto. Financial crimes are an international business, and so fighting it must be an international effort.

The decentralised nature of blockchain presents a formidable challenge to creating a solution. IT is the reason that crypto needs its dedicated regulation. The rules of traditional financial institutions are being hoisted onto crypto, ignoring the uniqueness of its innovation, and leading to an anti-regulation sentiment in its loudest fans.

Cryptocurrency networks provide a new paradigm; they offer secure, immutable storage that is resilient to single points of failure and censorship. You can see this through the news that broke of Hong Kong residents use of Arweave earlier this year. Innovative gaming platforms like Axie Infinity are providing stable income for the unemployed in the Philippines (which makes up 40% of its user base).

To fully support this new paradigm and make it safe for everyone, regulators need to distinguish between the risks posed by decentralised activities instead of traditional centralised ones. For centralised exchanges and custodial financial services, cryptocurrencies pose risks congruent with financial risks that are familiar to financial authorities, capital markets regulators, consumer protection, privacy bureaus and tax authorities around the world.

Traditional forms of regulation from the fiat world do not reciprocally apply to every aspect of crypto nor the fundamental nature of blockchain technology. However well-intentioned they may be, because these imposed regulations are built on an old system, they must be adapted and modified.

Something with such immense potential should be accessible, well-regulated and of benefit to everyone. Blockchain and digital assets are already revolutionising how we operate, and regulatory measures need to follow suit. Delivering outdated rulings and punishing those who do not blindly comply is not the way forward.

It’s natural to be cautious; one fear rippling through the world of crypto is overregulation. People are afraid that overregulation while lowering risk will also sabotage innovation. It is a valid fear, but not one that should keep us from pursuing any type of regulation at all.

A well-thought-out creation and application of regulation can lead to creating a verified network that will ensure trust and help blockchain realise its full potential while shutting the door to those intent on misusing and manipulating the system. It would be a massive step towards increasing the trust in crypto and ensuring its validity can continue to grow.

The days of crypto being a wild, unknown and unchecked frontier are over, but it can only continue to persevere and bolster its legitimacy by having regulatory oversight. But the important thing is it must be done in the right way.

About Sekuritance

The Sekuritance RegTech platform provides a single platform for every eGRC need, including end-to-end AML/CTF, CECL, FCPA, vendor management, beneficiary onboarding, investor check, card processing MFA checks, blockchain wallet checks, cyber-risk assessments, and other RegTech or Business Process Management requirements.

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