The regulation of cryptocurrency is a controversial and sometimes confusing topic. While there has been significant engagement by various government agencies, little formal rulemaking has occurred.
There have generally been two approaches to regulation at the state level in the US. Some states have tried to promote the technology by passing favorable regulations, for example Wyoming. However, authorities in at least ten other states, such as Hawaii and Maryland, have issued warnings about investing in cryptocurrencies. New York has eased restrictions for attaining a BitLicense in the hopes of luring back cryptocurrency companies that previously exited the New York market.
The rise of cryptocurrency exchanges has not raised sufficient concerns from a financial stability perspective, but their impact on consumer protection has prompted a regulatory intervention. Let’s examine why regulation is necessary for cryptocurrency exchanges and how new compliance technology can help.
Why Regulated Crypto Exchanges Are Essential
It’s advisable to use a regulated exchange when trading cryptocurrencies—or any commodity for that matter—in order to ensure that transactions are made safely.
Outside of the US, registration for exchanges varies in terms of allowances. In Japan, for example, exchange regulation is progressive as they allow foreign exchanges to register where they can demonstrate equivalent registration standards in their own country. However, in India, although the trade of cryptocurrencies in domestic exchanges is now allowed, the government regularly flip flop on their policy.
In 2019, France’s Financial Action Task Force (FATF) recommended that exchanges share the real-world identity of customers to help support Anti-Money-Laundering (AML) and Combating Funding of Terrorism (CFT) activities. Money laundering and terrorism are the two areas that regulation in cryptocurrency aims to tackle.
How Compliance Technology Can Aid Regulation
Globally, businesses spend about $436 billion each year on compliance. And with improved technology in compliance, agencies can maintain near-real-time access to secure compliance-related data held on the blockchains of regulated financial organizations.
Various blockchain analytics companies can help exchanges to comply with anti-money laundering regulations. CipherTrace, Chainalysis and Merkle Science, for example, also work out transaction risk levels based on activity related to suspicious addresses and wallets. High-Speed APIs are commonplace now and allow the automation of compliance tasks to provide real-time evaluations of cryptocurrency transaction risk.
The volatility of the cryptocurrency market has increased regulatory scrutiny, which has previously been nonexistent. A stable framework of regulations and monitoring is needed, but countries worldwide are in varying stages of implementing cryptocurrency regulation. The fact that traditional banks and financial institutions are increasingly adopting cryptocurrency suggests that investors need more protection – regulators should impose requirements to make the trading environment more secure. Lastly, developments in compliance technology can help regulators and members of the FATF to track transaction risk and prevent financial crimes.
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