The cryptocurrency area is changing so fast that every year a new trend emerges, from Initial Coin Offerings (ICOs) to Non-Financial Tokens (NFTs), just a few years have passed. In the face of this astonishing innovation, crypto companies and regulators face an increasing challenge: balancing security practices with new products and features.
Some companies’ approach is to act quickly and innovate as soon as they occur, leaving security processes such as the Know-Your-Customer (KYC) and anti-money laundering control (AML) as a secondary concern. The popular crypto exchange Binance seems to have used this strategy until this year, when regulators began to take drastic measures.
Binance’s KYC policy initially allowed users who did not fully verify their identity to withdraw up to 2 BTC per day. The exchange listed margin trading pairs with large fiat currencies and allowed up to 125x influence on its futures trading platform, but had to reduce the available influence and exclude margin trading pairs when an investigation was launched by the Internal Revenue Service and the US Department of Justice. …
Since then, Oslo Børs has adopted a compliance-driven approach and implemented mandatory KYC processes for global users per job. As a result, it lost about 3% of the total number of users.
While Binance has had to remove some of its offerings and reduce its influence on the platform, other exchanges still offer the same products to users. Yuri Kovalev, CEO of the cryptocurrency platform Zenfuse, spoke to Cointelegraph, that finding rules to allow qualified companies to compete is a challenge that must be addressed:
“Finding a way to balance regulation that protects investors and innovation is challenging, especially with new economic proposals popping up every few months.”
In an interview with Cointelegraph, Bittrex CEO Stephen Stoneberg noted that cryptocurrency rules are now “extremely complex” and handled differently in different jurisdictions.
Stonberg suggested that customer security should nevertheless remain a priority, as “stronger and clearer regulation is needed – as in the traditional financial sector – to ensure the security of customers’ assets and data.” As an example, Stonberg cited Liechtenstein’s blockchain law, which “provides greater security and clarity on how the stock exchange needs to attract new customers and protect client assets.”
Some industry players see regular clarity as a necessity, because without it, innovation can lag behind. In a recent blog post, Coinbase, the Nasdaq-listed cryptocurrency exchange, noted that their plans to launch a lending program had been stopped by the US Securities and Exchange Commission (SEC), which threatened to sue it “without explaining why. ”
Coinbase said they have tried to “interact productively” with the SEC, but it has never been made clear about the SEC’s motivations or how it can change the product to meet the requirements. The proposed alternative is to keep the regulatory authorities out of sight. CFTC Commissioner Brian Quentins defended this option, and at one point called for cryptocurrency exchanges to self-regulate, reflecting the feelings of many in the industry.
Is self-regulation a viable alternative?
The concept is not new: Organizations such as the Financial Industry Regulatory Authority (FINRA) have helped implement initiatives to protect securities investors through brokers and brokerage firms. Japan has formed a self-regulatory body for the Japanese cryptocurrency exchange sector – Japan Crypto Exchange Association (JCEA).
Stonberg does not think the answer is self-regulation, because “the complex nature of this digital ecosystem makes regulation more difficult.” For him, self-regulation means “stopping” all the hard work of regulating cryptocurrencies, “complicating the regulatory environment and disrupting the process.”
The founder of the Flare Network funding platform Flare CryptoFrenchie told Cointelegraph that he believes in “the ability of both decentralized and centralized platforms to create a self-regulatory environment that responds effectively to meet (or exceed) the needs of current regulatory requirements.” …