Cryptocurrencies face new legislation as governments seek to address concerns over risks. But when it comes to regulating the industry – and the digital services to help companies comply – we don’t need to reinvent the wheel.
For regulators, as for the rest of us, cryptocurrencies and digital assets like NFTs (non-fungible tokens) are becoming impossible to ignore.
Global cryptocurrency market capitalisation was valued at over $800 billion in 2022. New digital assets continue to emerge – even potentially from the Bank of England with its proposals for a digital pound.
Popularity and policing of crypto
However, change and regulation are inevitable for the industry.
The $32 billion FTZ crypto collapse in November last year highlighted this sector’s scale, risks and need for greater oversight.
More recently, the collapse of Silicon Valley Bank (SVB) demonstrated crypto’s interconnectivity with traditional finance. SVB is one of the few banks in the US offering services to cryptocurrency providers. Then when regulators stepped in to reassure SVB customers that deposits would be guaranteed, cryptocurrencies soared.
Financial stability risks in advanced economies
The sector’s continued popularity means that the need for improved policing will only grow. As the International Monetary Fund (IMF) has noted, it could soon be if it’s not already a problem.
“Crypto assets, including stablecoins [a type of cryptocurrency pegged to other assets], are not yet risks to the global financial system, but some emerging market and developing economies are already materially affected.,” its Deputy Managing Director recently wrote.
Advanced economies were also “susceptible to financial stability risks from crypto”, he and his co-author added, given institutional investors’ holdings.
The IMF’s Deputy Managing Director added, “It’s important for regulatory authorities to quickly manage risks from crypto while not stifling innovation.”
A range of risks related to crypto regulation
It’s not simply financial stability but consumer protection that concerns regulators.
In March, the Securities and Exchange Commission (SEC) filed charges against celebrities for failing to disclose they were paid for promoting cryptocurrencies. If people’s money is at risk or lacks transparency, actions will always be taken seriously.
“While we’re neutral about the technologies at issue, we’re anything but neutral regarding investor protection,” said the SEC’s Enforcement Division Director.
New platforms, meanwhile, increase concerns around cybersecurity, digital identity, biometrics and whether services can process payments quickly and securely.
Protecting companies and investors
As crypto and digital assets become a more significant part of the financial system, the lack of regulation will undoubtedly be addressed sooner rather than later.
Considering the strict Anti-Money Laundering (AML) and Know your Customer (KYC) compliance requirements introduced for traditional institutions in the past decade, there is an excellent template to copy.
These controls play a vital role in safeguarding data, minimising losses or misusing clients’ assets, and preventing revenue losses.
In doing so, they protect companies’ reputations, promote effective management, and protect investors and the market.
Adapting the regulatory regime
The regulation developed in the past 10+ years should give us confidence that any potential risks from digital assets can be managed effectively.
Since traditional financial institutions and digital assets will work together, we should draw on legislation for conventional providers to regulate the new market effectively.
Coupling this with the abundance of dynamic SaaS solutions in the market to transform and simplify processes, such as regtech solutions for fraud prevention or plug-and-play identity verification providers, will make adoption easier.
That is where we are headed. While uncertainty remains, the UK Treasury’s consultation on developing financial services regulation for crypto assets takes the existing regime as its starting point.
“The government’s view is that crypto assets and the activities underpinning their use should follow the standards expected of other similar financial services activities, commensurate to the risks they pose while harnessing potential benefits of the technology behind them,” it states.
It also notes that the Financial Services and Markets Bill laid “the legislative foundations” to bring stablecoins and crypto assets into financial services regulation. Meanwhile, the Crime and Corporate Transparency Bill aims to strengthen the UK regime for seizing crypto assets if needed.
With calls for a “fundamental reshaping of the state around technology” as part of a technological revolution in the UK, it’s crucial to view regulation as much about promoting the industry as managing the risks.
New problems, existing solutions
Moreover, we can draw on existing regulations to meet crypto’s new challenges.
In that case, we can also draw on the digital solutions that have enabled traditional firms to meet obligations effectively and efficiently. Digital providers in areas like identity verification help companies satisfy KYC and AML requirements, easing compliance burden and reducing the risk of fraud.
Meanwhile, solutions like ID-Pal streamline what could otherwise be a cumbersome process for customers.
By leveraging biometric, document and database checks to verify an identity in real-time, simple and secure identity verification can occur, protecting businesses from fraud, allowing for faster onboarding and providing a better customer experience.
Challenges and continued innovation
Of course, that’s not to say there won’t be challenges – and continued innovation.
The increasing use of digital assets is being accompanied by developments in digital identity. Emerging concepts, such as self-sovereign identity, are in progress, which gives users control over access to their personal identity information when setting up with a new provider or completing KYC checks.
We need a decisive lead from the government to provide the framework for a regulatory framework that is sensible and user-focused.
With that in place, digital providers can guarantee that financial services companies are compliant whilst ensuring that emerging industries, such as crypto and NFTs, can safely reach their full potential.
About the Author: Colum Lyons is the CEO and Co-Founder of ID-Pal.