As cryptocurrency continues its break-neck rise in popularity and usage, the calls by lawmakers and the financial industry for its greater regulation are getting louder and louder.
Over the past few years, cryptocurrencies have become ever increasingly mainstream. The industry – currently worth an eye-watering $1.65trn – has until recently been largely unregulated, with responsibility put at the feet of individual providers to take the lead. So, what is changing?
Recent work by RegTech firm PassFort detailed the rise of cryptocurrency and what is driving its growth. For example, the firm cited how Miami Mayor Francis Suarez revealed he would take a pay check in Bitcoin, while El Salvador made Bitcoin legal tender in June last year.
Over the last two years, the amount of unique crypto wallets have increased at a rate of 20 million users each year. In October last year, the Eurosystem also began investigation into the introduction of a digital euro.
However, there is a downside to this growth. As PassFort stressed, as more people have started to invest in cryptocurrencies, fraudsters have taken this as an opportunity to join the game. Consumers are being increasingly drawn to riskier markets, and this is leading criminal enterprises to capitalise on market weaknesses.
PassFort said, “Until recently, cryptocurrency was basically an unregulated area of financial services. There have been exchanges and providers that have acted as though they were regulated, taking anti-money laundering responsibilities seriously, but that hasn’t necessarily been because it was mandated.”
Where are the green shoots of regulation for cryptocurrency? Back in March 2021, the Financial Conduct Authority added crypto firms to the list of businesses required to submit a financial crime report. Meanwhile, in January 2020, any companies that undertake crypto-asset activity in the UK need to be compliant with the Money Laundering, Terrorist Financing and Transfer of Funds.
Currently, any FinCEN cryptocurrency exchanges are required to carry out KYC checks on new applications and use effective AML controls. In the EU, a regime is being proposed through Markets in Crypto Assets regulation. When adopted, only licensed providers will be allowed to offer cryptocurrency and operate crypto exchanges in the EU.
What is the future of crypto compliance? PassFort detailed how experts have predicted that the next decade will ‘bring an explosion of low-cost, high-speed payments that will transform value exchange the way the internet transformed information exchange’.
Elsewhere, the firm noted how the US Securities and Exchange Commission has proposed new rules that could bring more digital asset exchanges under its remit.
PassFort said, “One of the key problems right now is that individual countries and regions take very different approaches to regulation and dealing with issues related to cryptocurrency. This is a particular challenge, as many crypto service providers operate across borders.”
The IMF has also proposed a global regulatory framework that includes crypto-asset service providers, capital and liquidity requirements and limits on exposure. It suggest offering a ‘comprehensive and coordinated’ approach to managing risks to financial stability and market conduct that can be consistently applied across jurisdictions, while lessening the potential for regulatory arbitrage, or moving activity to jurisdictions with easier requirements.
PassFort concluded, “Wider institutional adoption and regulation means the future (and value) of cryptocurrencies will look very different in the years to come. Until then, much of the onus for good conduct in compliance will remain on the exchanges and providers themselves.”
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