Cryptocurrencies To Be Regulated: How Can Businesses Prepare?

With a range of cryptocurrencies widely available, the market developed quickly and regulators haven’t been able to keep up. While cryptocurrency falls under the SEC’s jurisdiction in the U.S., no firm regulatory framework with defined rules for trading has been imposed. Until now, businesses operating in crypto have mainly been worried about checking off boxes on requirements but are now realizing regulations, of some sort, are soon to come. We don’t know the full scope of those regulations just yet; however, the best way for businesses to prepare for the unknown is by showing regulators they’re already putting processes in place to maintain recordkeeping, an approach they’ve learned from the financial services industry. By maintaining thorough records and data, businesses are ensuring there is access if and when any specific information is required, while also mitigating other various risks such as money laundering.

Why compliance is necessary

Given the industry’s highly volatile nature, pressure has mounted for exchanges and companies to implement compliance measures. We’re starting to see some, including trading platform Robinhood and cryptocurrency exchange Binance Holdings, increase compliance hiring, targeting well-respected industry veterans, including former government regulators and executives from fintech companies, banks, and crypto firms. Among these hires are Jay Clayton, ex-SEC Chairman who joined Fireblocks and former Justice Department official, Jaikumar Ramaswamy, who was responsible for asset forfeiture and money laundering before recently being hired as Head of Risk, Compliance and Regulatory Policy at cLabs.

In September of this year, global recruiter, Hamlyn Williams Inc., reported 18 chief-compliance-officer searches for both fintech and crypto businesses so far in 2021 while conducting all of seven in 2020. Will Brown, executive search lead for financial services at Hamlyn Williams, shared that the reason for the increase is because there are many firms who are starting their business and looking for seed financing. They are in need of a chief compliance officer who can manage complex regulatory issues including obtaining a license to operate in the U.S.

The crypto industry has the world, including the U.S., at opposite ends. In one instance, President Biden’s administration recently announced it would ramp up regulatory scrutiny around cryptocurrencies with the goal of addressing and mitigating risks within the industry. Biden’s administration is looking at ways it can regulate stablecoins, which are backed by safe assets and can reduce volatility. On the other hand, SEC Chairman, Gary Gensler, has gone on record saying he doesn’t see much long-term viability for cryptocurrencies.

Gensler sees the thousands of existing cryptocurrencies similar to the “wildcat banking era”, which took place in the mid 1800s, when limited federal bank regulations led to the refusal of customers looking to redeem the value of gold or silver. To Gensler, modern-day crypto demonstrates how private forms of money are volatile and further proof that without regulations, crypto holders could be left without opportunity to redeem its value in money. Regardless of their stance, we are seeing an increased emphasis by both the Biden administration and Gensler on the need to protect investors, with Gensler has even suggested businesses register with the SEC to avoid issues with unregistered securities and violations. With Biden at the helm, I anticipated an uptick in regulation especially as his administration favored increased consumer protection.

Challenges facing crypto regulations

Aside from the increased pressure businesses operating in crypto are facing, the crypto market is unsteady, making it extremely volatile, which gives way for potential manipulations. The SEC has failed to keep up as we continue to see thousands of companies emerge, introducing new cryptocurrencies which creates the opportunity for market manipulation and abuse. But because this industry is still so new, the real challenge is how do we classify cryptocurrency? Will it be considered a tradable asset? Or perhaps qualify as a security? Or will it be something else?

Another challenge the industry faces is how do you regulate something that is indiscernible? Currently, there is a check and balance system on traded currency with different dollar amounts requiring varying confirmations. This is critical to those who mine cryptocurrencies as they are responsible for tracking and authorizing transactions. In turn, this serves as a level of security, making it harder for hackers to attack or stop trades. But, with no centralized authority influencing the supply, exchange or value of bitcoin, it is difficult to track and link transactions leading traders to the black market, avoiding taxes and financial penalties. Today, we still see some companies developing technologies that enable unregulated and unlawful behavior by traders, allowing transactions to fly under the radar. Still, there are companies who are focused on doing things fairly and honestly by providing services that will make upholding compliance easier.

What businesses operating in crypto can do to enhance compliance measures

Given the uncertainty of crypto compliance, the best way for businesses to ensure they’re adhering to all future regulations is to implement their own compliance measures that ensure accurate record keeping of all employee communications. As new regulations are proposed and implemented, this allows businesses to have a thorough, detailed picture of all correspondence to prove they’ve met requirements. Specifically, there are emerging technologies that can help maintain employee communication records and make them easily accessible, including who employees are communicating with and what information is being communicated.

Anonymity was an appealing factor in crypto’s infancy, yet transactions are not impossible to track and trace. Meaning companies can and are relying on new tools and technologies that offer the ability to automate communications data management thus providing in-depth insights on potential risks, threats or violations such as insider trading, market manipulation and/or abuse. These technologies and tools empower businesses with the ability to customize alerts based on specific needs, regulations and procedures.

Compliance technology is proven as financial firms around the world have relied on these tools to maintain recordkeeping allowing them to manage and mitigate compliance risks while also improving efficiency and reducing costs. Specifically, eDiscovery searches allow businesses to reach necessary data quickly and efficiently. These resources have proven to be crucial to capturing and enriching both structured and unstructured data – something required for financial firms as it pertains to recordkeeping.

While the regulatory needs for the crypto industry are still hanging in the balance, businesses must prepare for a drastic shift in oversight. The days of checking off boxes to keep auditors at ease are long gone and it’s time to adapt to the new reality that is strict regulation. Businesses operating in crypto must look to implement and enhance compliance measures and put teams in place while relying on advanced technology when appropriate. Given crypto’s volatility and unpredictable nature, I expect it to survive; however, it’ll be on the premise that compliance becomes the most common position held.

(Shiran Weitzman is the CEO of Shield, a company offering services that manage and mitigate risks associated with market manipulation and abuse.)