3 Biggest Challenges In Cryptocurrency Compliance Coming In 2020

October 28, 2019
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As we approach 2020, it’s important to keep an eye on how regulators are reacting to cryptocurrency businesses. In 2019, we saw regulators seemingly “wake up” to issues in the industry, and they issued a large number of new rules as a result.

This doesn’t mean that regulators want to destroy crypto or cut the legs off the industry. It’s just the opposite – by creating AML compliance rules for cryptocurrency, they are legitimizing these businesses and helping them run legally and effectively.

Keep in mind that while cryptocurrency regulation grew tremendously in 2019, so did crypto crime. Hackers stole over $4 billion in 2019 so far, up from $1.7 billion in all of 2018. Many of these attacks are helped by an insider, so internal controls are vital.

We can expect regulations to continue to increase, and compliance is essential. Here are three topics that will probably overshadow the rest in 2020.

1. Custody And Security

What does it mean to “have custody” of cryptocurrency? It turns out that question is more philosophical than many expect because crypto isn’t physical.

Maintaining Custody and Security

Some people keep their crypto key – the only way to access cryptocurrency – physically in their possession by storing it on a hardware wallet. Most people, though, use exchanges to hold their cryptocurrency in online “hot wallets.”

As a result, your company is responsible for maintaining the security required to keep crypto keys out of the hands of hackers. And regulators are focused on making sure you follow appropriate security guidelines, so they issue rules that make it clear what is required.

Existing Regulation

What custody regulations have been created so far? Unfortunately, not much. The SEC and FINRA issued a joint statement in July of 2019 saying that as far as they can tell, crypto custodians cannot meet the standards of the SEC’s Customer Protection Rule.

For example, crypto keys can be copied, making it impossible to determine the real owner.

That doesn’t mean the SEC and FINRA are giving up on the issue. However, they may need help from the legislative and legal spheres to define what theft of crypto means and how to determine true ownership.

What To Do

Right now, continue to focus on crypto security and best practices to prevent hacks and keep your customers’ wallets safe. Custody and security will continue to be a significant focal point in 2020.

2. The Funds Travel Rule

The Funds Travel Rule was a major hot topic in 2019. The fallout will continue into 2020. Here’s what you need to know.

Understanding the Funds Travel Rule

The Funds Travel Rule was an existing regulation that applied to international banks. It requires all financial institutions to pass specific information to the next financial institution regarding funds transmittals over $3,000. The organization must also maintain records of this information.

On June 21, the Financial Action Task Force (FATF) issued guidance that required cryptocurrency businesses in member countries to abide by this rule as well.

Why Does This Apply to Crypto?

Challenges in cryptocurrency 2020 - BitAML BlogDocumenting these types of transactions is very helpful for law enforcement because it creates a trail that helps them investigate and prosecute money laundering and other financial crimes.

Unfortunately, the habit regulators have of applying existing regular banking regulations to crypto has caused a lot of frustration among cryptocurrency businesses. Owners of crypto wallets aren’t always financial institutions, so how do you pass along information? And to who?

What To Do

Crypto businesses have 12 months to comply with this new crypto AML rule, so many will be working through the ramifications into 2020.

What you can do is take steps to determine if customer wallets are tied to a financial institution and balance this with privacy for the customer. If your business is the originating institution – sending crypto worth $3,000 or more – you’ll need to send the required information to the financial institution that is the custodian of the customer’s wallet.

If you’re the beneficiary or receiving institution, you’ll need to request that information from the originating institution.

Either way, you’ll need to retain detailed records of the information.

3. Market Manipulation

Manipulation is the largest and most consistent concern that regulators have. A lot of rules in 2020 will be focused on controlling this issue.

What is Market Manipulation?

Manipulation occurs when traders fraudulently influence the price of crypto for their own profit.

Unfortunately, there’s an enormous amount of fraud in crypto. Fake ICOs defraud investors of millions in so-called “exit scams” which involve launching new currencies with promising white papers and then disappearing with investor funds after the ICO.

Bitwise also issued a report in March of 2019 alleging that 95% of reported bitcoin trading volume was fake. However, the 10 exchanges that were legitimate are efficient and operate above-board.

Current Regulation to Address Manipulation

Two bills were introduced in the House of Representatives in December of 2018. The Virtual Currency Consumer Protection Act of 2018 and the U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2018 both aimed to address crypto market manipulation.

The bills were introduced and didn’t move beyond a committee, but they show that concern about crypto markets extends beyond the SEC.

The SEC continues to discuss crypto as a security token and claim the industry under its purview. This could mean a lot of changes for crypto markets in 2020.

What To Do

Continuing to monitor your own business and keeping careful compliance records will make it much easier for you to adhere to any regulations that are introduced in the next year.

We’re All In It Together

While talk of regulation can make crypto businesses sweat, in the end, everyone is on the same team. After all, it doesn’t do anyone any good if cryptocurrency becomes the realm of criminals and terrorists.

To make a strong, predictable profit in cryptocurrency, you need the sector to be taken seriously and to be and trusted. Regulation is key to that. Instead of seeing challenges in crypto regulation in 2020 as an enemy, embrace it as part of the maturing of the market.

Of course, this is easier to do if you have a clear and complete AML policy in place. If you need help getting yours nailed down, we’re here to help. Simply contact us to schedule a consultation.

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