Bitcoin Compliance: How Confusion in Cryptocurrency Has Hurt or Destroyed Businesses

March 26, 2018
Share the news!

If you’re a startup operating in the cryptocurrency space, it’s important to stay vigilant on regulatory compliance issues. And that isn’t to scaremonger – that’s exactly what BitAML has been saying for some time, as well as Coinbase’s then-legal counsel, Sarah Hody. Sarah told entrepreneurs this in a bitcoin developer meetup in Silicon Valley two years ago.

The cryptocurrency industry has several examples of compliance failures that resulted in adverse impacts against specific companies that set them back, put them out of business, and hurt the general cryptocurrency universe in the eyes of regulators altogether.

Some of the largest players have strived to uphold the importance of bitcoin compliance in an industry that is still largely seen with a skeptical eye by regulators and mainstream consumers.

In the United States, the automotive and food services industry have trade associations and regulatory bodies that develop compliance regulations and other best practices that ultimately help legitimize business operations in the eyes of regulators.

So, too should bitcoin startups begin to form, uphold, and upkeep the compliance rules that are out there – it will help the industry as a whole and legitimize the cryptocurrency space still largely in the shadow of regulatory bodies like the Security and Exchange Commission (SEC).

Growth and Compliance

Be optimistic door - Bitcoin Compliance - BitAML BlogIt’s clear that bitcoin will eventually become a solid, legitimate industry in the eyes of regulators the same way other industries are. Even as federal agencies and regulators have given squeamish nods to the cryptocurrency space, the industry is undoubtedly still young – meaning compliance is needed more than ever.

Remember when Coinbase was just starting out? As the company has grown, it has added more services for its customer base, which has inevitably led the company to develop and embrace regulatory compliance. When Coinbase launched its American bitcoin exchange, the company had to begin holding both bitcoin and US dollars.

When it added its US dollar holdings feature (as well as British Pound and Euro holdings), forced the company to adopt compliance norms and structure itself in a specific way when it came to its business practices in the eyes of federal regulators.

Cryptocurrency companies regardless of size and market cap must follow suit to establish themselves as legitimate forces within the industry as well as legitimate companies in the eyes of regulators. Cryptocurrency companies are still in learning mode, and have the added burden of learning how consumers interact with crypto.

Who Regulates Who?

A variety of federal agencies have claimed jurisdiction over bitcoin. Two years ago, every agency from the Security and Exchanges Commission (SEC), to the Commodities Futures Trading Commission (CFTC), to the Internal Revenue Service (IRS) all said they should be enforcing the rules for bitcoin and cryptocurrencies like it.

The SEC went a step further and created a digital financial task force to attempt to figure out and regulate this rapidly growing space. But what is really confusing for bitcoin startups is that many federal and state compliance standards tend to overlap – and it could seem more confusing than ever.

In the US, Bitcoin exchanges (such as Coinbase, crypto ATMs and kiosks, fiat to crypto, and crypto to crypto exchange activities) are considered MSBs. FinCEN issued a guidance regarding Persons Administering, Exchanging, or Using Virtual Currencies:

“In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”

As a “financial institution,” MSBs are required to comply with Bank Secrecy Act laws and regulations, including AML (Anti-Money Laundering) requirements such as KYC (Know Your Customer) rules, and other recordkeeping and reporting reasonabilitles.

That’s not all:

Consider what international legal firm, Norton Rose Fulbright, states in its global legal and regulatory guide to cryptocurrencies:

“As a general rule, where no specific steps have been taken to regulate cryptocurrencies in the relevant jurisdiction, it would be necessary to refer to the existing legal and regulatory frameworks to understand how they might apply to the new circumstances that the technology enables. This is particularly important where cryptocurrencies arise in the context of industries that are already significantly regulated.”

Why Comply?

The purpose of regulation in the cryptocurrency industry is all about protecting consumers, putting a stop to money laundering, terrorist funding, fraud, and ensuring taxes are paid correctly and recorded. The ultimate goal of regulators is protecting the consumer.

These are the main concerns that regulators are concerned with, and so for newly forming crypto startups, it’s important that they keep records of their customers and ensure the developers using their API are all operating legally.

And like Coinbase, every company should keep a list of activities that its users are prohibited from participating in, while constantly monitoring and measuring its platform.

The bottom line is this: as the cryptocurrency industry evolves, regulators will either create new rules and regulations or adapt and apply existing rles and regulations that reflect the specific political-economic context in which cryptocurrencies find itself. Companies should do their due diligence and create compliance procedures that are legally defensible under existing regulations.

When governments are under pressure to quell the aforementioned items (money laundering, terrorist funding, corruption, etc.) so defining compliance can easily invite an unwanted crackdown by the authorities that could have otherwise been avoided.

Here’s the bottom line:

There is so much opportunity and limitless space for innovation when it comes to cryptocurrencies and areas like financial payments and transactions, new forms of value creation, fundraising, and consumer confidence. Cryptocurrency innovators must keep the needs of both society and their consumer base in mind.

Compliance is the quickest way to do this, and it is clear from the past that those companies that fail or defy compliance practices will be fined or will simply fail.

Companies that deliver on compliance can continue to compete, innovate, legitimize themselves within the industry and among regulatory agencies, and continue to reap the benefits of this brand new and fascinating cryptocurrency universe.

If you have questions regarding bitcoin compliance, schedule a free consultation today! We’d be happy to help!

Similiar Blog Post

Bitcoin ATM Day 2024 – Celebrating Progress Amidst Evolving Regulations

August 17, 2020
This old-fashioned scam is more prevalent than you think — and your customers could be at risk. If you run a cryptocurrency exchange, kiosk...

Interview with Patrick Camuso on Crypto Taxes, Regulations, and Compliance Challenges

August 17, 2020
This old-fashioned scam is more prevalent than you think — and your customers could be at risk. If you run a cryptocurrency exchange, kiosk...

I’m a Crypto Startup With a Newly Written AML Policy. Now What?

August 17, 2020
This old-fashioned scam is more prevalent than you think — and your customers could be at risk. If you run a cryptocurrency exchange, kiosk...