The emergence of cryptocurrencies and digital assets has transformed the financial industry’s perspective. These digital currencies offer new investment opportunities. For example, trading between different countries or financing international projects is becoming easier than ever before. However, alongside their immense potential, the crypto industry encounters regulatory hurdles. In this article, we will explore the regulatory issues that the crypto industry confronts and how regtech can assist in achieving compliance within the realm of digital assets.
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Challenges for Businesses Related to Cryptocurrency Regulations
The crypto business faces significant regulatory challenges when it comes to anti-money laundering (AML) and countering the financing of terrorism (CFT). Criminal activity has been linked to cryptocurrencies due to their pseudonymous nature, making it difficult to trace and identify transaction participants.
Regulators are worried about the potential use of cryptocurrencies for money laundering, terrorism financing, and other illegal purposes. Similar concerns are inherent in more standard forms of business that want to integrate blockchain payment for their goods and services. It is almost impossible to recover lost funds, and the number of major hacks is shocking every month.
Striking a balance between complying with AML and CFT regulations and upholding the privacy and decentralized ideals of cryptocurrencies poses a complex dilemma for authorities. Those who want to use or trade cryptocurrency must take care of their security. One of the reliable protection tools is VPN. If you use a VPN for crypto market access, you can prevent data leakage and account hacking. The main advantage of a VPN for crypto trading is hiding personal data. In addition to anonymity, encryption helps a lot, as well as additional protection measures against phishing and viruses.
Challenges in Cryptocurrency
#1 Anonymity of Cryptocurrency Transactions
Monitoring cryptocurrency transactions poses a challenge due to the anonymous and pseudonymous nature of these transactions. In fact, parties involved in cryptocurrency transactions are not linked to their identity. Instead, wallet addresses are used, allowing for anonymous creation. This anonymity complicates the tracing of transaction sources and destinations, as well as the identification of parties involved in suspicious transactions.
#2 Classification
Regulators face a significant challenge in accurately classifying existing cryptocurrencies as they are a direct result of recent advancements in digital technology. Crypto assets offer new possibilities for barter, investment, and financial transactions, but their intricate nature makes categorization difficult. Furthermore, market developments and rapid innovation complicate regulators’ efforts and leave room for potential gaps.
Achieving a comprehensive classification in the market is a complex task. One commonly used approach is comparing crypto assets to traditional currencies. Extensive research conducted by the European Parliament reveals that crypto assets have yet to gain universal acceptance as a general payment instrument.
#4 Difficulty in Tracking Transactions
Tracking transactions across different blockchains becomes challenging due to varying levels of transparency in different cryptocurrencies and blockchain networks. This poses difficulties for financial institutions and regulators in monitoring and identifying suspicious activity involving multiple cryptocurrencies or blockchain networks.
#5 The Difficulty of Determining the Legality of Means
Illegal actors exploit the distinct characteristics of crypto assets for various nefarious activities, including money laundering, tax evasion, financing terrorism, human trafficking, corruption, and political funding. The transaction path involving cryptocurrencies poses significant challenges for financial institutions and law enforcement agencies in terms of tracing, thus making it an enticing method of payment for criminals.
Strategies To Overcome Compliance Challenges
#1 AML And KYC Process
To ensure the integrity of cryptocurrency transactions and comply with financial crime regulations (FCC), banks must take several measures. These include implementing robust anti-money laundering (AML) and customer due diligence measures. Additionally, banks need to follow Know Your Customer (KYC) procedures to verify the identities of cryptocurrency users and reduce the risk of illicit transactions.
Moreover, provisions on countering the financing of terrorism (CFT) further enhance security by preventing any funding of terrorism through cryptocurrencies. Banks should accept cryptocurrencies only from approved Virtual Asset Service Providers (VASPs).
#2 Behavior-Based Activity Monitoring
Banks and financial institutions can detect suspicious activity in cryptocurrency transactions by utilizing behavior-based monitoring. This involves analyzing the behavior of cryptocurrency users, enabling banks to identify potential involvement in illicit activities through the detection of unusual patterns of activity. For example, an abrupt increase in transaction volume or transactions associated with uncommon locations raises red flags for money laundering or terrorist financing. Leveraging advanced and emerging technologies, such as advanced analytics, AI/ML, and NLP, can bolster the detection of suspicious activities, accurately analyze user behavior, identify genuine threats, and reduce false positives/alarms.
#3 Risk-Based Monitoring
Monitoring cryptocurrency transactions using peer-to-peer analysis proves valuable since criminals frequently utilize peer-to-peer exchanges to convert cryptocurrencies into fiat currency. Banks can identify suspicious activity and prevent money laundering by monitoring these exchanges.
#4 Robust Risk Management
Financial institutions must ensure effective enterprise risk management to operate safely in the cryptocurrency environment. To protect themselves and their customers from the inherent risks associated with cryptocurrencies, banks need to implement robust risk management frameworks.
By implementing an effective risk management process, businesses can assess each transaction/customer for potential risks and evaluate:
- The source of funds
- The purpose of the transaction
- The potential for money laundering or other illicit activities.
#5 Blockchain For Compliance
Businesses of any form can leverage blockchain, a trustworthy and transparent distributed ledger technology (DLT), to streamline financial transactions and boost compliance efforts. Blockchain enables tracing and tracking the flow of cryptocurrency funds, increasing the transparency and accountability of cryptocurrency transactions. It also helps in identifying and reporting suspicious activities, detecting patterns of money laundering, and automating AML and KYC compliance processes with smart contracts. However, effectively efficient blockchain technology and analysis in crypto compliance efforts require specialized technical expertise.
Conclusion
Businesses can use cryptocurrency even today, but there are many concerns. In addition to the unstable price of crypto assets, the need for full regulation and transparency is of greater concern. The arrival of the regulator is only a matter of time, and this will be a green light for both banks and just businesses wishing to conduct transactions on the blockchain. If you are willing to take risks, you should at least minimize them. Use the approaches listed above to benefit from blockchain.
