Fraud Prevention Month – Week 4: How Fraud is Influencing the Future of Crypto Law

March 26, 2024
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As Fraud Prevention Month comes to an end, our attention now turns toward the new front lines in our never-ending fight against fraud: how to crack the code of crypto regulation. During our last week, we’ll drill down on the technical approach regulators take toward cryptocurrency and the legislation informing these actions.

Technical Approach to Regulation

It would seem that the approach among regulators has become much more precise and highly technical when it comes to the cryptocurrency regulatory landscape—a well-intended course of action but one with broader implications and potential unintended consequences.

In the process of playing catch-up with the latest technological trends, regulators could end up killing the proverbial golden goose that they aim to nurture. This constant game of regulatory catch-up can easily create a sorry environment of uncertainty and unpredictability for businesses operating in the crypto space. Recent legislation illustrates this technical, targeted approach, capturing the complexities of the crypto ecosystem within inflexible legal frameworks.

While crafted with the best of intentions in the interest of protecting consumers and the integrity of the market, these laws risk being overly prescriptive. Such an approach could chill industry growth and flexibility, integral to the kind of technological and financial innovation that holds so much promise for consumers. Zeroing in too narrowly on any one facet of this market, with an eye to regulation, runs the risk of missing larger, systemic issues needing attention—problems like broad financial and consumer literacy and more global regulatory standards. 

These technical regulations, on their own, tend to result in a sort of patchwork of rules that vary from one jurisdiction to the next, and even one business model to the next, with vast differences between them. This sort of fragmentation makes compliance efforts for international, national, and regional businesses quite daunting, leaving them with little incentive but to shop around for markets with fewer or more favorable regulations, undermining broader efforts to stamp out fraud and protect consumers. While diving into the specifics of the latest crypto regulations, we will see examples of how regulators draft “crypto” bills that directly target and narrowcast specific aspects of the industry.

Specific Legislation Examples

California’s SB401

SB401 is notable for its specific targeting of crypto ATMs. The bill mandates transaction and fee caps, as well as consumer disclosure requirements for kiosk locations. The main aim of this legislation lies in consumer protection and safeguarding against fraudulent scams perpetrated via kiosks. However, in applying a $1,000 per person, per day, daily limit, the legislation compromised the ability of law enforcement to collect valuable information from SARs, as this arbitrary transaction threshold is well below the $2,000 FinCEN MSB SAR filing threshold. 

Connecticut’s HB6752

The aim of HB6752, like that of SB401, is to protect consumers, though the Nutmeg State took a slightly different approach. Importantly, Connecticut, unlike California, recognized the SAR threshold, setting their daily customer limit at $2,500.) HB6752 also mandated several specific requirements including the exact font size of mandatory consumer warnings and the customer’s “right” to obtain a receipt. The bill also obligates the operator to provide a refund at the request of the customer if it is their first transaction with the institution and the customer’s wallet or exchange is located outside the US. As all crypto transactions are inherently irreversible, this creates a layer of added complexity for operators.  

Regulatory Trends

The world of cryptocurrency regulation is quickly becoming more detailed, focusing on specific types of businesses like crypto ATMs. This shift towards tailor-made rules reflects a deeper change in how regulators are interacting with the crypto world, aiming to tackle the unique risks each sector poses.

This move towards specific regulations brings both challenges and implications. Businesses in the crypto field need to stay alert and adaptable, especially as the regulatory focus can quickly change, as seen with crypto ATMs. This situation hints at the need for companies to be ready for new rules that could affect their operations.

The Implications of Targeting Specific Business Models

Targeting certain business models, such as crypto ATMs, opens up questions about the future of crypto regulations and their wider impact. These focused rules not only impact the businesses they target but also pave the way for how other crypto activities might be regulated. This could lead to a complex regulatory landscape with different rules for different states and sub sectors of the crypto marketplace, making it harder for businesses to comply and potentially hindering innovation.

This approach signals a significant shift in how cryptocurrency is regulated, suggesting a move towards a more hands-on role by regulators in shaping the crypto market. This raises important questions about innovation in the space: whether regulatory pressures might limit innovation or direct it in new ways.

For crypto businesses, this environment requires a forward-thinking and knowledgeable approach to compliance. Understanding targeted regulations and preparing for their effects is crucial. Moreover, it highlights the importance of working together across the industry and communicating with regulators to find a balance that protects consumers while supporting innovation and growth.

Over-Regulation Fears and Industry Response

The crypto industry is wary of overregulation, which, in the worst-case scenario, could block innovation and, in other scenarios, force it underground or abroad into less-regulated markets. The challenge would then be to work with some of the regulators to figure out how exactly such laws could be developed that would clamp down on fraud yet encourage growth. The industry would need to argue for a regulatory framework that supports innovation while protecting consumers.

Looking Ahead and Moving Forward

As we close out Fraud Prevention Month and move through the rest of 2024, paying attention to regulatory trends is paramount. These will affect you if you are an investor, business owner, or general enthusiast. The cryptocurrency community will have to take an active part in all discussions about the regulations that will set up a playground for fighting off fraud while effectively continuing to foster innovation.

Be sure to keep up with law changes and keep involved with the community dialogue on this topic. Consult your legal advisors in this ever-changing regulatory environment. 

Connect and Stay Informed

In the dynamic world of cryptocurrency, staying one step ahead of fraudsters is paramount. BitAML offers the tools and expertise you need to navigate this complex landscape, ensuring your business remains compliant and secure. As we move forward, let’s take the insights from this Fraud Prevention Month to heart, working together to safeguard the future of cryptocurrency.

Beyond Navigating Fraud Prevention, BitAML is a robust resource partner in combating fraud, ensuring regulatory compliance, and more. In an era where scammers are increasingly sophisticated, targeting the crypto sector with new and ever-evolving tactics, BitAML offers advanced strategies and insights to secure your business. Elevate your business with BitAML’s expertise across the crypto landscape. 



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