Is Running A Crypto Business Really That Risky?

September 23, 2019
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How risky is it to start a business in the cryptocurrency space?

We’re not talking about personal financial risk, like the risk of losing an investment in a startup, or your own profits if the crypto market is down.

When we talk about risk, we’re talking about risk of exposure to fraud, financial criminals, the black market, and the like. We’re talking about the institutional risk for money laundering and the financing of terrorism.

Think of the question in that context. It’s a question we hear a lot. “How risky is it to start a cryptocurrency business?” The implication being, how risky is it compared to other business models in the financial sector.

Is cryptocurrency somehow more at risk of exposure to money launderers and drug dealers than, say, a check-cashing store, a slot machine business, or something more mainstream like a money lender or even a bank?

Is cryptocurrency business somehow more risky than other financial businesses?

The answer is yes.


Why Risk In Crypto Business Is A Feature, Not A Bug

Every entrepreneur in the space knows that operating a crypto business is risky. A business that operates in a big city is riskier than one that operates in a medium city or small town. A business that operates internationally is riskier than one that operates exclusively in the United States. Even the nature of the product itself has certain risks.

Yet it seems like regulators have a particular distaste for cryptocurrency. There’s a lot of debate in the space over how much regulation is welcome. There are numerous opinions about what regulation should entail. There are also plenty who argue that recent regulations are designed to undermine the crypto project entirely.

But let’s back up. Is this perception of regulators accurate?

As we addressed in a previous post, Demystifying Regulators: What They Really Want To See From Crypto, there’s a common perception that regulators are “the bad guy” and seek to crush innovation. But it isn’t actually true.

While confusing and seemingly reactionary regulatory action like the FATF’s Funds Travel Rule might make it look like regulators are picking on the cryptocurrency industry, the reality is more nuanced.

The goal of regulators is consumer protection. Period.

It’s true that regulators move more slowly than the market and that often means confusing, awkward regulatory action that does more harm than intended. But ultimately, the goals of the regulators and business align: Both want a safe, fair, competitive market.

The biggest reason that regulators seem to be “picking on” cryptocurrency is actually pretty mundane.

You ready for it?

Cryptocurrency is new.

That’s the big one.

Because cryptocurrency is new, and because its key benefits are unprecedented in finance, financial regulations designed for banks don’t neatly apply. They were designed to address the technology of 50 years ago, not 2019.

That’s why crypto businesses are in such an odd holding pattern with regulators over AML compliance, and why it’s uncomfortable. They are expected to design cryptocurrency compliance programs to honor regulations that weren’t designed for them.

Cryptocurrency is a true disruptor. A disruptor is exciting, innovative, and signals limitless opportunity. But, a disruptor also disrupts. Nowhere is that more evident than regulatory action in crypto.

Cryptocurrency isn’t being picked on. The same level of scrutiny and skepticism applied to ATMs, credit cards, and online banking (regulators are still behind on that last one).

That’s because when it comes to what regulators deem risky about new products and services, they’re looking at three major factors, and cryptocurrency fits the bill perfectly.

These 3 Things Make Cryptocurrency Businesses Inherently More Risky

Regulatory guidance suggests certain products and services may pose a higher risk of money laundering or terrorist financing depending on their specific nature.

New technology poses a heightened level of inherent risk in the eyes of regulators.


There are many reasons, but three broad ones we’ll focus on:

1. Cryptocurrency allows for rapid movement of funds.

Is Running A Crypto Business Really That Risky? - BitAML BlogWhenever you deposit money into a traditional bank, it can take days for the transaction to clear.

Cryptocurrency can be transacted fully and completely from one owner to another (with no middlemen taking little cuts and fees along the way) within seconds.

This is an amazing innovation in finance for consumers.

It’s also an amazing innovation in finance for financial criminals, money launderers, and financiers of terrorism.

The ability to move funds quickly complicates AML compliance and investigations because it makes it easier for criminals to hide or disguise their ill-gotten gains, and skips several opportunities to create a paper trail for law enforcement to follow.

The lack of clear regulations or widespread adoption of AML compliance within crypto, even for principled reasons like privacy and financial independence, benefits financial criminals as much as honest end-users.

It’s no wonder scam activity is so prevalent in crypto. Crypto benefits scammers. Thus, regulators are concerned with the ability of scammers to quickly move their funds.

2. The funds can go anywhere and everywhere (and do)

The traditional financial system is very closed off. Sanctions, trade deals, and the individual economic policies of each nation complicate the way money moves from country to country.

Cryptocurrencies like bitcoin carry the same value all across the world, because the value is determined by the decentralized market. Policy from groups like the Federal Reserve doesn’t affect it.

That, coupled with its innovative digital structure, makes cryptocurrency effectively borderless. This is a huge benefit to the unbanked or underbanked around the world, or people living in unstable economies being driven into the ground by greedy dictators.

But once again, these same benefits apply to international financial criminals and terrorist groups as well.

The ability for cryptocurrency to be transacted internationally within an instant and with a minimal paper trail is another reason for regulatory caution.

3. Crypto is anonymous (sort of)

Regulators, as well as law enforcement, are concerned about the potential or pseudo-anonymity of certain transactions. 

This is a bit of a misunderstanding. It’s true that crypto wallet addresses are not necessarily directly tied to a specific individual, like a bank account, making it difficult to determine ownership of one or multiple wallets. 

Wallets can also be passed to a third-party without a formal record, complicating efforts to create an audit trail.

However, each coin’s respective blockchain does provide a linear record of every transaction, and each “block” contains a lot of information that is useful in investigations.

Regardless, the anonymous capabilities of cryptocurrency, both real and perceived, create compliance challenges that regulators are concerned about. 

Once again, the same benefits enjoyed by honest users also benefit money launderers, drug dealers, and terrorists seeking stores of value and innovative ways to finance their operations.

Debates over privacy are as old as the internet (and older). We’re not trying to make an argument there. What we’re saying is, when it comes to regulators, the anonymity or potential anonymity a new technology affords criminals is a major concern.

Can Crypto Businesses Do Anything To Reduce Risk?

A lot of this might sound discouraging, but our goal here is not to scare you. Entrepreneurs who want to get into crypto should get into crypto.

Our goal is to be honest about the regulatory challenges cryptocurrency faces and will continue to face. These challenges will not go away. Both the industry and regulators will need to work together on a path forward.

We also want to be honest about the risks inherent in operating a crypto business. There are unique risks with any business. Cryptocurrency is no different.

In the interest of honesty, if your goal is to reduce risk, there’s not much you can do.

Strategies to reduce risk would require scaling your business down, not up. Smaller towns, predictable customer demographics, fewer products.

What you can do is factor your risk level into your cryptocurrency compliance regime. That starts with a risk assessment performed by an experienced AML compliance professional which will give you an honest and accurate overview of your risk profile.

From there, you develop policies and procedures not to reduce your risk, but to mitigate it.

Regulators don’t expect cryptocurrency businesses to reduce their risk levels to zero. They expect that business owners are developing practices to mitigate their risk level, whatever it may be.

Key Takeaways For Crypto Businesses

Cryptocurrency isn’t going anywhere. But there’s a lot we can do to mitigate risk and develop smart cryptocurrency compliance strategies that reduce regulatory scrutiny.

The first step is a risk assessment. You can read more about risk assessments at our blog post on the topic here.

Or, you can reach out for a free consultation. BitAML is staffed by experienced AML compliance professionals who exclusively serve the cryptocurrency industry and have developed hundreds of compliance regimes that have helped crypto entrepreneurs stay in the good graces of regulators.

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