The demand for digital assets is growing, with various new services rolling out constantly in the FinTech ecosystem. Regulators in different countries are faced with challenges on how to keep up. Even as regulations and compliance laws have been gathering momentum globally, many countries still don’t have firm policies in place to regulate the transactions. This is why investors remain somewhat apprehensive about getting involved in these technologies.
The fragmented nature of regulations presents a number of challenges in terms of compliance. This has created a problem of trust and transparency in the market. Investors and traders tread cautiously when carrying out transactions to avoid dealing with bad actors.
In light of this, FinTech startups are embracing new self-regulation frameworks to help achieve a form of standardization in digital asset activities and governance. Access to self-regulation comes in various forms. However, all groups involved share the same vision: to help startups navigate the fast-growing industry. While regulators are working on also embracing various forms of regulations, relevant associations are being created to provide a layer of oversight on digital assets with the aim of protecting consumers while advancing the growing markets.
“The year 2020 is widely seen as the year of crypto regulation. Policies, guidelines, frameworks, and legislation have surfaced in various jurisdictions around the world and firms, including custodians, are working towards being compliant,” says Clarence Leong, OTC Lead of Onchain Custodian, a Singapore-based custody service for institutional clients and accredited investors to manage digital assets.
On a global scale, when it comes to implementing regulations, countries around the world are dancing to the beat of the latest Financial Action Task Force (FATF) recommendations made in October 2018. The policies include combating the financing of terrorism, addressing anti-money laundering deficiencies, and regulation of financial assets.
“The traditional finance Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations are key areas that combat the issue of anonymity and enable the ability to identify specific sources of funding. If you can identify the source of the funding, then you can track back where the illicit money comes from,'' says Tom Tirman, Co-founder of PARSIQ, a blockchain compliance, monitoring, and workflow automation platform.
It essentially means preparing for a future wherein payment data relating to the initiator and recipient of a transaction travels with the payment--referring to the guidance known as FATF’s “travel rule.”
Following that, the monetary authority of Singapore (MAS) set out its payment services act 2019 strictly in line with the current anti-money laundering (AML) and counterterrorist financing (CTF) rules, instructing all related businesses in Singapore to register first and then apply for a license to operate in the jurisdiction. The EU also recently released the Fifth European Anti-Money Laundering Directive (AMLD5) adopted earlier this year.
The regulation is aimed at tackling the use of the financial system for the funding of criminal activities, terrorist financing and the large‑scale obfuscation of funds. “With regulation, you will be able to definitely prevent some bad actors from being active in this space,” says Leong.
Canada has also recently annexed the FATF directives into its regulations. Its regulatory body, Financial Transactions and Reports Analysis Center of Canada, (FINTRAC), introduced plans for an enhanced AML regime in a March 10 report, wherein all crypto companies will be treated as money service businesses by June 1, 2020.
Adam Cai, Chief Executive Officer of Toronto-based VirgoCX, says the enhanced regulation will help restore trust in the wake of high-profile incidents involving digital assets.
“To some, this may appear to be a hinderance, but in reality, it will force management teams to perform proper planning and to act more responsibly … Our hope is that the new regulations will aid to restore trust in the industry.”
He adds that this will “enable greater adoption of cryptocurrency and greater acceptance of our industry as a whole from banks” as well as the general public.
As regulations increase in the ecosystem, service providers like custodians also need to ensure they are in compliance to remain relevant in the market. These regulations directly affect these service providers as they will be obligated to implement measures to counter money laundering and terrorist fundraising. These include customer due diligence (including KYC) and transaction monitoring. They will also be required to maintain comprehensive records and report suspicious transactions.
A number of these custodians have already begun incorporating compliance frameworks. “This allows us to provide safe, secure and compliant storage of digital assets for all our clients across the globe,” says Leong.
However, for these custodians to ensure effective compliance, specific KYC/AML compliance platforms are necessary. These platforms help to safeguard custodians against possible financial crimes and to prepare them for regulatory reporting when necessary.
“Compliance tools that can simplify workflows and automate much of the manual reporting can enhance custodians with greater productivity,” says Tirman. “Understanding the risk analysis of payment transactions, for example, is critical to making sure custodians can do their part to follow regulation.”
Tools that automate and decentralize the processes for compliance ensure that activities in the blockchain ecosystem are constantly monitored and parties are alerted to any irregularities as they happen.
“As blockchain technology continues to evolve and offer greater capabilities for solving the technological challenges such as scalability, decentralization or tokenization of assets, we expect to see more solutions based on artificial intelligence, machine learning, and big data,” says Patrick Kim, Founder & CEO, Uppsala Security, a risk management platform for decentralized technologies. “It’s all about being ready when regulators decide to impose different measures and guidelines regardless of the technology.”
Integration or the combination of these solutions, such as compliance and cybersecurity tools, does not just help custodians maintain their competitive edge. It also holistically facilitates a more secure ecosystem that has adequate safeguards against illicit activities. Increased regulations and use of compliance tools are good calls for the industry as a whole, as they will promote trust, attract more investors, and accelerate the mass adoption of FinTech solutions.
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