The need for more compliance-driven crypto exchanges

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Cryptocurrency has been around for over 10 years now, but it is only in the last few years that the subject of regulation has become more and more discussed. As the cryptocurrency’s market capitalization continues to grow, more governments and banks are taking notice. Traditionally, the crypto space has been called a sort of wild west, but frankly those days are ending. If decentralized assets are really to have a place on the global stage, then they need to be regulated. However, perhaps calling on governments to enforce the rules is not the best idea for this industry. Perhaps the key to effective surveillance comes from the very companies that are innovating in this digital revolution today.

What regulations are enforced today really depends on where you look. Some jurisdictions, like China, have come out pretty harshly against any form of cryptocurrency that is not state-made. Then there are places like the EU and the US, both of which strive to enforce fairly comprehensive KYC and anti-money laundering standards on exchanges in their parts. respective areas of the world. It is plausible that even more elaborate rules will be put in place as the global adoption and market capitalization of crypto continues to grow.

The exact degree of stringency of the rules around decentralized assets is certainly a matter of debate, and traditionally, many cryptocurrency purists have instead opposed any sort of blanket regulation. Early adopters are largely hostile to the old financial system, but frankly, this is exactly that financial system that Bitcoin and its ilk must find a way to fit into. If key institutional players are to get involved, cryptocurrency firms such as exchanges need to take action to show that they are prepared to act on it. In reality, the best way to do this is self-regulation.

Self-regulatory organizations (SROs) are not new to crypto either. There is already a variety, like the Crypto Ratings Council (CRC) in the United States or the CryptoUK in the United Kingdom.

These organizations are typically collaborations of various top crypto companies looking to show they are committed to regulation by overseeing it themselves. It is also an attempt for community members to have meaningful control over how regulations are enforced, rather than simply waiting for them to be imposed on them by a government. By managing them themselves, they can issue guidelines flexible enough to allow appropriate development and growth of the sector, but still based on regulations emerging from the existing system.

What makes this particularly important is the fact that cryptocurrency has nuances that were not possible with previous forms of currency. On the one hand, blockchain transactions are fundamentally irreversible. There are a few caveats to this depending on the chain, but it is one of the cornerstones of most assets available. Blockchains are also generally transparent. Everything that happened to them is accessible to everyone.

None of these features apply to cash or even credit transactions. Current government regulators are struggling to catch up and understand the implications, but the SROs run by crypto exchanges understand them fairly well. Real industry insiders are realistically the best sources for deciding how to tie the realities of decentralized assets to the rules that govern financial transactions. If everyone is just waiting for the government to act, we will probably wait awhile and get rough and unrealistic rules.

When properly managed, SROs should ultimately have the effect of making cryptocurrency products and platforms significantly more attractive to institutional investors. This can give them peace of mind that the exchange they choose to operate with will not be investigated or suddenly closed. In light of some of the issues that have arisen over the years, both with platforms and projects, it’s easy to see why professionals need a higher degree of accountability. If this can be achieved, it should make cryptocurrency a much more accepted and trusted asset, and allow it to become a part of the global financial system.

Ultimately, despite what some crypto fans might be feeling, regulation is coming. It’s basically already there, but not uniformly applied or understood. If the industry is to both grow in a healthy way and be taken seriously, then PBOs are probably the smarter way. This is clearly becoming more and more evident to many of the larger companies, who have typically formed these organizations. Those who don’t commit, however, can get a headache when some form of regulation is inevitably brought to their doorstep.

About the Author As CEO of MEX Digital, Courtney Fitzsimmons has over 14 years of experience in the financial services industry. Although a significant part of her career has been with the Australian regime, more recently she has led the expansion of MultiBank Groups, providing her with valuable insight into global regulation. Fitzsimmons is a regular consultant to regulators and industry peers aiming to bridge the gap between operators and regulators to ensure a sustainable environment in which all stakeholders can thrive.

She builds on this experience to understand local and cross-border regulation and how to operate, grow and prosper in existing and emerging markets.

Having experienced the rapid growth and development of the industry, Ms. Fitzsimmons has extensive technical, business and compliance experience, from start-ups to established companies like MEX Digital.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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