If you have been observing the news and the industrial trends, you would agree that there won’t be a year without a new development in the cryptocurrency space. In a few years, we saw trends running from initial coin offerings (ICOs) to non-fungible tokens (NFTs). Despite the innovations taking place in the industry, crypto companies and regulators are facing challenges.
These challenges accompany the innovations within the space, and the major challenge is establishing balanced security practices with new features and products entering the market. For instance, some companies prefer to move rapidly and adopt innovations based on availability.
Thus, security measures such as Know Your Customer (KYC) and Anti-Money Laundering (AML) are secondary implementation. One crypto exchange that maximizes this approach to the fullest is Binance. This strategy leveraged it to the peak until regulators are cracking on them this year.
The initial Binance’s KYC policies allow you to withdraw about 2 BTC in a day as an unverified user. Likewise, you can use the margin for trading up to a leverage of 125X for futures trading space. All of these dropped a bit when the Internal Revenue Service of the United States began to investigate Binance as an entity.
As a result, the exchange uses the compliance strategy to implement obligatory KYC mandates for its global users. However, they lost about 3% of their users to these new KYC policies. On the other hand, some other exchanges present users with those features Binance cut down due to regulatory investigation.
Following the strict regulatory acts around the Binance investigation, a leading executive in the industry noted that it is challenging to create a soft space for crypto companies that will be complaint to seek innovation in the fast-paced crypto industry. He registered this impossibility by stating that you cannot protect investors and embrace innovations simultaneously in an industry where new offerings surface every month.
It is noteworthy to agree that crypto regulations are complex issues, and handling them varies with jurisdictions. Nonetheless, it should be the top priority of every exchange to keep clients’ data safe and protect their assets regardless of the regulations implemented.
Meanwhile, some industry players believe that there should be clear regulations before innovations receive full embrace. Otherwise, crypto exchanges may be forced to hold onto their new features or products because of a legal threat from the regulators.
An example is Coinbase and the US Securities and Exchange Commission (SEC) conflicts while launching a lending program on its platform. However, industry participants and enthusiasts believe that there can be an alternative to all of these. And that is for every cryptocurrency exchange to engage in self-regulatory processes.
Brian Quintenz—the Community Futures Trading Commission (CFTC)—leads this “alternative” movement.
Can Self-regulation Dissolve the Knots?
While this may be a viable option for the country players, it is not a new concept. Some countries have started creating an agency that seeks to help crypto exchanges with this effort. As a result, they are assisting exchanges to protect securities investors. An instance is the Japanese self-regulatory body—the Japanese Cryptocurrency Exchange Association (JCES)—that helps the crypto exchange sector.
As much as self-regulatory is an alternative for some players, some other parties believe it is not the wisest alternative because of the complex nature of the digital ecosystem and how tricky regulations can be. This may translate to discarding all regulatory efforts made in the past and complicating regulations again. This will lead to a stop for the progress made all along.
Meanwhile, some believe that both decentralized and centralized platforms can work together to create a self-regulated crypto environment that will meet the needs of today’s regulatory requirements and transcend them. And there is a theory that applying existing systems to the innovative crypto industry may stifle its growth instead of supporting it all around.
In the absence of regulatory frameworks in a country where cryptocurrency exchanges operate, they can leverage the self-regulatory approach to implement efficient practices from leading financial organizations. Likewise, crypto platforms should conduct self-analysis and module development tailored to suit the current regulatory schemes.
Are Decentralized Exchanges a Threat to the Market?
There is a broad debate on accepting a self-regulatory approach for crypt exchanges. But another discourse is gaining ground as it implies the financial and economic effects on a nation. It is the impact of decentralized exchanges (DEXs) on the financial market.
Authorities believe that exchanges such as non-custodial decentralized exchanges are dusting away the efforts of centralized exchanges towards establishing the KYC and AML policies. They argued that criminals would be able to conduct their illicit acts with the ability of users to register an account without an email address.
But suggestions exist that DEXs can make efforts to become more transparent and help enforcements agency track down illicit transactions and reduce their impacts to a large extent. With this kind of effort, there will be industrial standards. Companies and projects will work around the industry to establish transparency and bring some other companies and projects to be transparent with some activities and claims.
Considering the prevention of illicit transactions, there are postulations that cryptocurrency exchanges can work together to create standards that they will leverage to implement AML and KYC measures. It is too early to sit and observe how DEXs will play out. Instead, there should be strategic measures that prevent illicit transactions from taking place on DEXs.
Using AML and KYC policies, regulators may receive some level of assurance to protect users from cyberattacks and reduce the economic impact of those illicit transactions. That’s because the account holder’s identity is known to some extent, and such can undergo investigation for a suspected financial crime. This will make such a platform hostile towards illicit transactions.
Fundamental Cryptocurrency Rights
Have you heard about the “fundamental cryptocurrency rights?”
It is a postulation by the Binance Company that every human being must have access to tools that will help them leverage the financial markets and, in turn, bring them economic independence. Likewise, this postulation argues that responsible crypto platforms should protect their users from illicit acts by KYC implementation.
However, some industry leaders mentioned that it is not but only a marketing strategy by Binance. Their basis came from the point that Binance didn’t start well until regulators began clamping down on it. Meanwhile, Binance called for efforts to restructure global finance’s future collaboratively. And every nation should be responsible for who to spearhead the movement.
Cryptocurrency is everyone’s right. Everyone needs to engage it from a different dimension. But it is essential to understand that any agency overseeing this regulatory effort should check criminals without causing frictions for innovations.
It appears that cryptocurrency companies are willing to work with regulators to create solutions to the existing challenge. This won’t prevent users from accessing innovative digital currencies or associated services within the ecosystem. But it seems a party is happy while the other is not due to the various lawsuits against cryptocurrency companies.