Cryptocurrency exchanges reported trading volumes exceeding $14 trillion in 2021. With a market cap of around $983.72 billion, the crypto market is not limited to a few professionals fluent in technology. At the same time, the future of crypto compliance also deserves the attention of every stakeholder in the crypto ecosystem. The increasing usage of crypto is one of the first things which has driven the interest of regulators in cryptocurrency compliance.
Most importantly, the threats of using cryptocurrencies for illegal activities have also strengthened the discussions around crypto regulations and compliance. As a matter of fact, illegal transactions accounted for almost 0.15% of all crypto transactions in 2021. Even if the number appears trivial, illicit addresses received around $14 billion in 2021 in comparison to the $7.8 billion in 2020.
Therefore, it is important to strengthen the regulatory grasp over cryptocurrency operations to deal with the growing misuse of cryptocurrencies. However, it is also important to have oversight regarding the potential future of cryptocurrency compliance for introducing meaningful changes in this domain in the future. The following post helps you figure out the crypto compliance trends you can expect in the future. Let us learn about the challenges for crypto compliance in the future and how crypto compliance regulations are shaping up.
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Why Does Crypto Compliance Matter for the Future?
Upon the introduction of Bitcoin in 2009, many people could not predict or foresee the humongous growth of cryptocurrencies. Over the course of time, Bitcoin has become quite a common name throughout the world. On the other hand, the crypto ecosystem has expanded by considerable margins, with new cryptocurrencies arriving in the market every day.
The New York Times reported that almost 100 new cryptocurrency projects are created on a daily basis. On top of it, cryptocurrencies are more accessible to the general public with easy-to-use exchanges and crypto wallet apps. The number of crypto users has increased by a humongous margin of almost 20 million within one year between 2020 and 2021.
The rapid growth of cryptocurrencies and their mainstream adoption are significant highlights for crypto compliance future as they expose the crypto ecosystem to various risks. One of the most common examples of risks points toward fraudsters who seek to exploit the crypto market. Why? The limited scope of regulations in the comparatively new and burgeoning crypto market serves as easy fodder for malicious agents.
Furthermore, the lack of formidable regulations also encourages the use of cryptocurrencies for money laundering, tax avoidance, and terrorism financing. All these factors clearly point to the urgent necessity for crypto compliance in the present as well as in the future.
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Role of the Regulators in Crypto Compliance
Before diving straight into the details of crypto compliance risks, it is important to understand the role of regulators in compliance. Cryptocurrencies and blockchain technology have become mainstream topics owing to their increased adoption. According to the Financial Action Task Force or FATF, blockchain and cryptocurrencies can introduce radical changes in the financial landscape.
However, the speed and global reach, as well as anonymity of these technologies, present formidable risks. What could a regulator do in such scenarios? If you think of it, the role of regulators in crypto compliance is not as straightforward as you imagine it to be. Regulators are always caught in the middle of any new development. Strengthening regulations could restrict the growth and developments in crypto, while a flexible approach could enable criminals to exploit the vulnerabilities in regulations.
At the same time, compliance professionals have to deal with future of crypto compliance in industry developing recently. As people try to discover new ways of understanding cryptocurrencies, it is critical to reflect on the opportunities alongside threats and risks. The responsibility of following regulatory guidance also comes with the need to reflect on evolution of cryptocurrencies and updates in blockchain technology.
Can regulations keep up with the pace of new technologies emerging in the field of cryptocurrencies? At the same time, the introduction of many new products and methods for transferring value worldwide can provide new ways for criminals to exploit regulations. Therefore, the role of regulators in crypto compliance future is nothing short of challenging. What are regulators doing now to address crypto compliance?
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Existing State of Crypto Compliance Regulations
The best way to anticipate crypto compliance trends for the future would obviously focus on an assessment of existing regulations. Bitcoin grabbed the attention of the Financial Action Task Force or FATF immediately upon its launch in 2009. The FATF has added recent additional guidance in their recommendations.
It also aims to introduce consistency throughout different crypto service provider frameworks. On top of it, regulators such as FinCEN and the SEC have also accepted cryptocurrency as some form of cash equivalents or securities. Most of the attention revolving around crypto compliance has been focused on addressing anti-money laundering objectives.
The European Union has also set a precedent for the future of crypto compliance with new regulations for cryptocurrencies. The EU has experienced many problems in establishing clear and strict crypto regulations owing to the anonymity and decentralized aspects. However, the EU imposed its first cyber-sanctions regime in November 2020, focused on Chinese, Russian, and North Korean actors involved in cyber-attacks on member states.
In addition, businesses dealing with cryptocurrencies in the UK must have to follow the Money Laundering, Terrorist Financing, and Transfer of Funds rules. Businesses working with cryptocurrencies must also register with the Financial Conduct Authority or FCA. Furthermore, the FCA has mandated cryptocurrency businesses to submit financial crime reports.
One of the most significant milestones in recent crypto compliance trends is the Markets in Crypto Assets or MICA regulation by the European Union. The MICA regulation can revolutionize crypto compliance through a definitive regulatory system for cryptocurrencies. Upon complete adoption in the EU, the MICA regulation would allow only licensed providers to operate crypto exchanges and custodial wallets.
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Challenges for Crypto Compliance in the Future
Cryptocurrency and blockchain technology has found widespread application in the financial industry. As a result, a major share of the crypto compliance risks emerges from the possibility of using cryptocurrencies for illicit activities. The scrutiny of regulators, enforcement agencies, and tax authorities all over the world has been increasing on crypto exchanges, investors, and other entities associated with crypto.
Therefore, traders and exchanges have to follow the regulatory frameworks and legal requirements, which are constantly evolving alongside the industry developments. What are the potential challenges for crypto compliance which would be significant in the future? Here is an outline of the notable challenges for crypto compliance.
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Lack of Classification
Many regulators have come up with distinct and innovative approaches to dealing with crypto regulations. However, the future of crypto compliance needs a cohesive framework, which can help in resolving the nuances associated with different cryptocurrencies throughout the world.
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Painting Cryptocurrencies as Money
The classification of cryptocurrencies as money or an equivalent to traditional fiat currency would also introduce unavoidable regulatory measures. Therefore, US regulators have avoided the classification of cryptocurrencies as money. In addition, fiat-backed stablecoins can also create ambiguities regarding regulations for cryptocurrencies and fiat currencies.
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Shifting towards Future Markets
Another important highlight among crypto compliance trends focuses on the lack of specific regulation for cryptocurrencies. For example, US regulators throughout different jurisdictions and states leverage the rules from existing laws pertaining to securities investments for governing cryptocurrencies and tokens. However, the scale and pace of change in the domain of crypto assets would call for regulators to come up with completely new structures for dealing with the crypto industry.
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Classification of Investors
Investors have been classified traditionally on the basis of different metrics. The common indicators used by US regulators for classification of investors include wealth, legal status, and transaction size. On the other hand, the scope of such classification has been limited to the primary market rather than secondary markets. Therefore, investors working with cryptocurrencies are obviously left out of the traditional classification for investors.
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Dependence on Intermediaries
As of now, self-custody crypto wallets remove the role of intermediaries, which serve as a crucial component in securities regulation. Without the intermediary, wallet users can seek different ways to bypass the existing regulations.
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Criminal Activities
The biggest challenge in defining crypto compliance for future would obviously turn the limelight towards criminal activities. Cryptocurrencies are a massive threat with respect to money laundering and tax evasion, alongside many other notable criminal activities. The evolution in the ways they are used for criminal activities also presents a formidable challenge for regulators to adapt accordingly.
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Future of Crypto Regulations
The importance of crypto compliance and the challenges of crypto regulation show that compliance will be an inevitable aspect of crypto in the future. Most recently, the US Securities and Exchange Commission SEC introduced new rules for including crypto exchanges under regulatory control. The initiative can help in capturing platforms dealing with crypto, which are not under the control of the regulatory agency.
However, the list of challenges for the future of crypto compliance showcases the necessity for comprehensive crypto compliance and regulatory framework. The existing state of the cryptocurrency compliance space presents a disconnected and fragmented global compliance framework.
You can find different regulatory practices for cryptocurrencies in different countries and regions. For example, countries such as Egypt and China have imposed direct bans on popular crypto exchanges. Recently, China strengthened the curb on cryptocurrencies by imposing a ban on any type of crypto mining or transfers. In addition, many other countries have also imposed implicit bans on cryptocurrencies.
How is this a major issue for the future of cryptocurrencies? Almost every exchange in the crypto space works globally, transcending borders while imposing significant challenges for regulators as well as crypto providers. Interestingly, one of the good news for crypto compliance future points to the efforts of IMF for a global framework. The International Monetary Fund has proposed a global regulatory framework, which aims to encompass all licensed crypto service providers. At the same time, the framework would also consider the strict limits and liquidity requirements in the crypto sector.
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Bottom Line
The description of expected trends for crypto compliance in the future showcases a lot of attention to challenges for compliance. Cryptocurrencies have created a constantly evolving and improving industry with new changes introduced every day. At the same time, the adoption of cryptocurrencies as common digital services or applications has also raised concerns regarding crypto compliance future and its implications.
How will crypto investors, exchanges, users, and other entities associated with cryptocurrencies evolve in the future? The future of cryptocurrency compliance needs a global regulatory framework applicable to precisely categorized groups of investors and crypto assets. Learn more about cryptocurrency compliance and the related best practices to prepare for the future right now.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!
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