Even as cryptocurrencies become more widely accepted as an asset class, they are struggling to abandon their reputation for living in the digital “Wild West,” a place where laws and regulations rarely apply.
However, there are signs that the lawless era of cryptocurrencies is nearing its end. And as a result, companies marketing crypto assets and digital service providers are scrambling to avoid getting on duty due to new regulatory requirements.
Cryptocurrency markets have grown rapidly since the start of the coronavirus pandemic, and the industry’s value regularly exceeds $ 2 trillion, according to financial authorities.
Last month, Fabio Panetta, a member of the European Central Bank’s executive committee, told US audiences that the crypto market was larger than the subprime mortgage market when it triggered the global financial crisis in 2008. rice field.
He said an estimated 16 percent of Americans and 10 percent of Europeans were somehow exposed to cryptocurrencies or related assets — and Warning about potential danger Of the market crash.
Today, the ECB is one of many regulators around the world looking at ways to curb this previously unmonitored space, where lack of rules is at the same time an important attraction and source of concern. is.
This has led more and more cryptocurrency companies to seek help in complying with growing regulatory requirements, says Rachel Woolley of Dublin-based compliance software company Fenergo.
“Many virtual asset services companies have backfilled their compliance obligations because they haven’t been able to fulfill their compliance obligations sufficiently effectively,” said Woolley, Fenergo’s global director of financial crime.
“This idea that you can deliberately violate your obligations must go. The reality is that regulation. [in crypto] It will be tougher and fined, “she adds.
Fines and bans have already been imposed.
As a basic requirement, regulatory agencies want trading platforms and service providers to perform money laundering prevention checks. This is a rule that keeps many people stumbling.
In April, the Office of the Comptroller of the United States announced Cease and desist order To Anchorage Digital Bank, which claimed to be the first federally recognized digital asset bank to act as a custodian and provide cryptography to its customers. However, last month, License Watchdog withdrew its approval for lack of control over monitoring suspicious activities such as money laundering prevention checks.
The ban is consistent with findings from Fenergo showing increased targeting of crypto-related businesses by regulators.
Last August, the exchange BitMex was forced to pay a $ 100 million fine to the American Commodity Futures Trading Association for failing a money laundering prevention check.
Many crypto companies claim that most players in the industry are keen to follow the rules, but lack of clarity about what is needed hinders this effort.
UK regulatory agencies have been criticized for slow progress in both the registration of companies wishing to provide digital asset services and the establishment of crypto frameworks.
Nikhil Rathi, CEO of the UK’s Financial Conduct Authority, said last month that regulators are waiting for more authority to oversee crypto companies beyond basic money laundering prevention requirements.
He also said that the FCA has so far considered only 33 companies to be suitable for its business. “Many were rejected because of inadequate preparation to prevent harm, or to identify it in the first place,” he said. “You need to draw a clear line … As we consistently warn, if you invest in cryptocurrencies, you need to be prepared to lose all your money.”
Legal debates over digital assets can also pose new challenges. Sergei Romanovsky, CEO and founder of Nebeus, headquartered in Barcelona and lending cash to cryptocurrencies, found this in a difficult way.
His business almost collapsed under the tension of a lawsuit alleging that the company did not properly protect the customer’s money. The case ended in favor of Nebeus, but Romanovsky was severely affected by the court’s decision to temporarily freeze the company’s assets due to a technical misunderstanding.
He claimed in a British court that he kept the $ 1.5 million in question in so-called “cold storage.” It’s a USB stick-like device that keeps your digital assets safe by keeping them offline. The court initially ruled that this was unacceptable and led to a freeze order.
“Looking back, there was a simple step that Nebeus had to take: to hold the suspicious fraudulent crypto assets in a way that the court could better understand,” says Romanovsky.
Fenergo’s Woolley warns that companies can also be the prey to unexpected regulatory shifts. She states that the proceedings against Anchorage are a source of concern because regulators look like flip-flops.
“I’m worried that regulators will license Anchorage last January, but within 18 months, regulators will re-license. The problem is that these systems are in the first place. That’s why we licensed the regulatory agency unintroduced. “Woolley asks. “These checks should have been done since day one.”
But in addition to protecting against the dangers of money laundering, regulators are now focusing on consumer protection in crypto trading. In addition to the UK FCA, a group of European financial regulators agreed in late March that many crypto assets are highly risky, speculative and subject to “active promotion”. bottom.
Many in the crypto industry expect new regulations to vary from country to country, and companies may be able to move to jurisdictions where the rules are more favorable.
Ian Mason, head of UK financial services regulation at law firm Gowling WLG, said the potential for this regulatory arbitrage transaction is a concern due to the global nature of cryptography.
“We need to better integrate regulations so that there are consistently high standards across the crypto market,” says Mason.
Digital asset markets hit new fragile highs
The rapid rise in the sum of all crypto assets shows that consumers are more motivated to keep them as an alternative to traditional currencies and other valuable stores, he reports. increase Michael Cabana.
However, recent major fluctuations in asset-class market capitalization again show the danger of assuming that crypto is a one-way bet.
Since 2017, the market has been characterized by large spikes and lower totals, reflecting significant fluctuations in the trading value of Bitcoin and rival currencies.
Market value surpassed $ 3 trillion in November last year and plummeted to nearly $ 1.6 trillion in February, but has not yet recovered.