Even as cryptocurrencies gain acceptance as an asset class, they are struggling to shake off their reputation for inhabiting a digital “wild west” – a place where laws and regulations rarely apply.
However, there are signs that the lawless days of cryptocurrencies are coming to an end. As a result, companies that market crypto assets — as well as digital service providers — are scrambling not to be held accountable by new regulatory requirements.
Cryptocurrency markets have grown rapidly since the start of the coronavirus pandemic, and the industry’s value has regularly surpassed $2 trillion, according to financial authorities.
Last month, European Central Bank board member Fabio Panetta told a U.S. audience that the market for crypto is now larger than that for subprime mortgages — $1.3 trillion — when it triggered the 2008 global financial crisis.
He said an estimated 16 percent of Americans and 10 percent of Europeans were in some way exposed to cryptocurrencies or related assets – and warned of the potential dangers of a market crash.
Today, the ECB is one of many regulators around the world looking for ways to rein in this previously unregulated area where a lack of rules has been both a major attraction and a cause for concern.
This has led to more crypto companies asking for help in complying with growing regulatory requirements, says Rachel Woolley of Fenergo, a Dublin-based compliance software company.
“Many virtual asset service companies have met their compliance obligations because they have not met them as effectively as they could have done,” said Woolley, global director of financial crime at Fenergo.
“This notion that one can intentionally violate one’s obligations must go. The reality is this regulation [in crypto] will be tighter and there will be fines,” she adds.
Fines and bans are already being imposed.
As a basic requirement, regulators require trading platforms and service providers to conduct anti-money laundering checks — a rule that causes many to stumble.
In April, the US Office for the Comptroller of the Currency issued a cease and desist order against Anchorage Digital Bank, which had claimed to be the first federally chartered digital asset bank capable of acting as a custodian and offering crypto to its customers . But last month, the license watchdog withdrew the license, citing a lack of controls in monitoring suspicious activity — including anti-money laundering controls.
The ban aligns with research by Fenergo showing an increase in regulators’ targeting of cryptocurrency-related businesses.
In August last year, trading venue BitMex had to pay $100 million in fines to the US Commodity and Futures Trading Association for failing to pass money laundering controls.
Many crypto companies argue that while most players in the industry are keen to follow rules, a lack of clarity about what is required hampers those efforts.
UK regulators have been criticized for slow progress on both registering companies looking to offer digital asset services and establishing a framework for crypto.
Nikhil Rathi, chief executive of the UK’s Financial Conduct Authority, said last month that the regulator is waiting for more powers to oversee crypto companies beyond basic anti-money laundering requirements.
He also said that the FCA has only found 33 companies to be operational so far. “Many were turned down because they had taken insufficient precautions to prevent damage or even detect it in the first place,” he said. “We have to draw clear lines. . . As we have repeatedly warned, you must be prepared to lose all your money when investing in crypto.”
Legal disputes over digital assets can also bring new challenges. Sergey Romanovsky, the CEO and founder of Nebeus, a Barcelona-based company that lends cash for crypto, found this out the hard way.
His business nearly collapsed under the strain of a court case alleging the company failed to properly protect a customer’s money. The case ended in a verdict in Nebeus’ favour, but Romanovsky was hit hard by a court decision to temporarily freeze the company’s assets due to a technical misunderstanding.
He argued in a UK court to keep the $1.5 million in question in so-called “cold storage” — a USB stick-like device that keeps digital assets safe by keeping them offline. The court initially found this unacceptable, which led to the freezing order.
“In retrospect, there were simple steps that Nebeus should have taken: namely, to keep the suspected fraudulent cryptoassets in a format that the court would better understand,” says Romanovsky.
Fenergo’s Woolley warns that companies can also fall victim to unexpected regulatory changes. She says the case against Anchorage is a cause for concern because it makes regulators look like they’re turning around.
“I worry that regulators licensed Anchorage last January and are coming back to it less than 18 months later – the question is why did they license them without those systems even being in place? ” asks Woolley. “These controls should have been there from day one.”
But in addition to protecting against the dangers of money laundering, regulators are now focusing on consumer protection in crypto transactions. Alongside Britain’s FCA, a group of European financial regulators agreed in late March that many crypto assets are highly risky, speculative and subject to “aggressive advertising”.
Many in the crypto industry expect that new regulations will vary from country to country, potentially allowing companies to move to jurisdictions where the rules are more favorable to them.
Ian Mason, head of UK financial services regulation at law firm Gowling WLG, says this potential for regulatory arbitrage is worrying given the global nature of crypto.
“Regulation needs to be more interconnected so that there are uniform, high standards in the crypto markets,” says Mason.
Source: Crypto News Austria