PassFort: The need for regulation in the crypto space

By Alex Richter, Head of PassFort
Alex Richter, Head of PassFort, on the future of cryptocurrency regulation and compliance

Cryptocurrency has firmly entered the mainstream financial culture. 2021 saw a year of record growth for cryptocurrency, surpassing a $3 trillion market valuation last November. Moreover, cryptocurrencies have become a prominent fixture of the news cycle, with stories of volatile prices, Tether valuations, and banned crypto adverts garnering attention in national news publications, something that would have been rare five years ago. 

With this phenomenal growth and widespread acceptance, the risks associated with crypto have fundamentally evolved. Despite its volatility, or perhaps because of it, criminals and fraudsters are drawn to a sparsely regulated environment that presents ample opportunity for exploitation. Alongside minor criminal offences, crypto is currently enabling more nefarious practices including money laundering, terrorist financing, and tax evasion. 

With the global nature of crypto, alongside the various technical aspects of blockchain, comprehensive and thorough RegTech needs to be incorporated to best support the regulation that’s coming. 

The regulatory state of crypto

Regulators have been steadily implementing small-scale regulatory measures for crypto in recent years. Any UK organisation offering cryptocurrency services has had to comply with the Money Laundering, Terrorist Financing and Transfer of Funds act and register with the Financial Conduct Authority (FCA) to gain temporary approval to operate with crypto while seeking full authorisation. However, many businesses are still yet to pass the full authorisation test and face being unable to operate within the UK. 

In March 2021, the FCA also mandated that any business using cryptocurrency was required to submit a financial crime report, which applied to businesses that host cryptocurrency exchanges and provide crypto wallets. While a commendable action in attempting to prevent crypto-related crimes, it is some way from being effective. 

The US regulatory body, the Commodity Futures Trading Commission (CFTC), has gone further with its requirements and enforcements. Crypto exchanges are obliged to implement Know Your Customer (KYC) checks for new users. In 2021, the regulatory body fined Coinbase $6.5 million for “reckless, false, misleading or inaccurate reporting”.

The EU is also at the beginning of implementing its own crypto regulatory system. Once fully adopted, the Markets in Crypto Assets (MICA) regulation will mean only EU licenced crypto exchanges can operate in EU countries. 

Presently, the regulation around cryptocurrency is fragmented along national and regulatory borders. As regulations are likely to be tightened, forward-thinking crypto firms are getting ahead by implementing their own (KYC) and Anti-Money Laundering (AML) systems, which stand them in good stead for compliance with more comprehensive regulation.

Diginex’s EQUOS crypto exchange has sought to combine new financial blockchain technology with more traditional aspects of the financial services landscape to build confidence and assurances in the operation. Much like many banks, they have incorporated third-party risk and compliance solutions, allowing for thorough onboarding of new customers and continuous risk monitoring of current ones. Diginex is at the forefront of responsible crypto thinking, using technological solutions to adhere to and prepare for future regulation while undermining the unsavoury features of crypto.

The future of crypto 

Optimistic predictions on crypto's capacity to “transform value exchange” are plentiful, coming from financial institutions and casual users alike. While potentially revolutionary, what the continued impact of the growing cryptocurrency space will be is uncertain. 

To prepare for all eventualities, stronger regulation and compliance proposals are growing increasingly common. The US Securities and Exchange Commission (SEC) proposed new rules which will bring many digital asset exchanges under its remit for regulatory purposes. Experts in the sector predict the crypto industry may well fall under an expanded SEC, below a new definition for ‘exchanges’, giving the right for seizures of platforms not currently under the jurisdiction of a regulatory body.

The need for crypto regulation is apparent, with prospective legislation having the capacity to influence the value of currencies and exchanges. Those who implement measures now to reduce criminal activity will stand in good stead. 


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