The cryptocurrency space moves rapidly, so much so that every year, there’s a new trend: from initial coin offerings (ICOs) to nonfungible tokens (
The cryptocurrency space moves rapidly, so much so that every year, there’s a new trend: from initial coin offerings (ICOs) to nonfungible tokens (NFTs) only a few years have passed. In the face of such astounding innovation, crypto companies and regulators face a growing challenge: balancing security practices with new products and features.
Some companies’ approach is to move fast and adopt new innovations as they become available, leaving security processes such as Know Your Customer (KYC) and Anti-Money Laundering (AML) checks as a secondary objective. Popular cryptocurrency exchange Binance seemingly used this strategy up until this year when regulators started cracking down.
Binance‘s KYC policies initially allowed users who did not fully verify their identities to withdraw up to 2 BTC per day. The exchange listed margin trading pairs with major fiat currencies and allowed leverage up to 125x from its futures trading platform, but had to reduce available leverage and delist margin trading pairs when it reportedly started being investigated by the United States Internal Revenue Service and Justice Department.
The exchange has since taken a compliance-friendly approach to its business and has implemented mandatory KYC processes for “global users, for every feature.” The move saw it lose around 3% of its total user count.
While Binance was forced to remove some of its offerings and scale down leverage on its platform, other exchanges are still providing users with these same products. Speaking to Cointelegraph, Yuriy Kovalev, CEO of crypto trading platform Zenfuse, noted finding regulations that allow compliant companies to compete is a challenge that needs to be addressed:
“Finding a way to balance regulation that protects investors and innovation is hard, especially in a space where new financial offerings appear every few months.”
Speaking to Cointelegraph, CEO of cryptocurrency exchange Bittrex Stephen Stonberg pointed out that cryptocurrency regulations are now “quite complex” and are being handled differently in different jurisdictions
Stonberg implied that customer safety should nevertheless remain a priority as “more robust and clear-cut regulation — like in the traditional financial sector — is needed to really ensure client assets and data are safe and secure.” As an example, Stonberg pointed to Liechtenstein’s Blockchain Act, which “provides a lot more certainty and clarity around how an exchange needs to onboard new clients and protects a clients’ assets.”
Regulatory clarity is seen as a necessity by some players in the industry, as without it, innovation may be left behind. In a recent blog post, Nasdaq-listed crypto exchange Coinbase noted that its plans to launch a lending program were halted by the U.S. Securities and Exchange Commission (SEC), which threatened to sue it “without ever telling [them] why.”
Coinbase said it attempted to “engage productively” with the SEC but never received clarification on the SEC’s reasoning or on how it could alter the product for it to be compliant. A proposed alternative has involved leaving regulators out of the picture. The Commissioner of the Commodity Futures Trading Commission (CFTC) Brian Quintenz has championed this alternative, at one point calling for cryptocurrency exchanges to regulate themselves, echoing the sentiment of many in the industry.
Is self-regulation a viable alternative?
The concept isn’t new: Organizations like the Financial Industry Regulatory Authority (FINRA) have helped enforce initiatives meant to protect securities investors with brokers and broker-dealer firms. In Japan, a self-regulatory body for the country’s crypto exchange sector, the Japanese Cryptocurrency Exchange Association (JCEA), has been formed.
Stonberg does not believe the answer is down the self-regulatory path, as the “complex nature of this digital ecosystem makes regulation tricky.” To him, self-regulation would mean “unwinding” all of the hard work achieved on the regulatory front for crypto and “re-complicating the regulatory environment, putting a block in progress.”
The pseudonymous founder of Flare Network-based decentralized finance (DeFi) platform Flare finance CryptoFrenchie told Cointelegraph that he believes in the “abilities of decentralized platforms and centralized platforms alike to deliver a self-regulated environment that reacts effectively to meet (or exceed) the needs of modern-day regulatory requirements.”
The DeFi project founder added that current systems have “proven to be incapable of meeting the needs of the current financial system,” and added:
“To apply these same systems to an even more fast-paced environment like crypto could prove to be more stifling to its potential than supportive.”
Founder and CEO of crypto exchange CEX.IO Oleksandr Lutskevych suggested self-regulation may be an option, saying that in the firm’s experience, self-regulation is the answer “when…
cointelegraph.com