Crypto depends on the ability of regulators to create a framework that protects consumers and makes investing in crypto more welcoming.
The basis of any exchange of value is trust. The more two parties trust each other, the more they will feel confident engaging in transactions. Not just engaging in a high volume of transactions, but higher value transactions, too.
Bitcoin (BTC) and other cryptocurrencies are certainly accomplishing a lot when it comes to creating a decentralized environment where the ability to trust another party is taken out of the equation by a blockchain. Hardcore enthusiasts who already understand this are the ones most willing to reach into their coffers and pour money into the crypto revolution. The truth is, though, that the average consumer still isn’t at that point yet.
Some libertarians probably don’t want to hear this, but in order for the crypto world to reach critical mass, it needs much broader adoption, and the average consumer is going to need another layer of protection in place. They need a set of rules and somebody to complain when things go awry.
Related: Why we need evolutionary, not revolutionary, regulatory initiatives
There are levels to this
Blockchain technology certainly does an amazing job of allowing participants to exchange value in a trustless environment. If you don’t share your private keys, nobody can steal your value. Teaching this to newly minted crypto holders is fundamental to getting them to buy in.
While many view that next step as a hindrance to adoption, regulation in the crypto space will most certainly accelerate it. The more layers we add to the safety net for consumers, the more confident new investors and adopters will be in getting involved.
Rules let freedom reign
The Bank Secrecy Act took effect in the 1970s and stands as the first piece of significant legislation in the United States surrounding Anti-Money Laundering and terrorist financing. It essentially forces banks to cooperate with the U.S. government in fighting financial crime. Following the terrorist attacks on the World Trade Center in September of 2001, the Patriot Act was born, further opening up the lines of communication between banks and governments in the same vein.
Fast-forward to 2019, an international governing body called the Financial Action Task Force extends the travel rule to include not just banks but virtual assets and exchanges. The rule stipulates that virtual asset service providers must share the identities of users trading assets worth $1,000 or more.
Related: FATF AML regulation: Can the crypto industry adapt to the travel rule?
Tracking and providing that information sounds pretty straightforward, and it should be that way. But it also means virtual asset service providers need to fulfill all kinds of other tasks in order to become compliant, including:
- Establishing what a typical crypto transaction looks like so that they can spot abnormal patterns signifying potential criminal activity.
- Screening customer wallets regularly.
- Sharing a list of potentially blacklisted customers with other virtual asset providers and authorities.
- Sharing Know Your Customer information with virtual asset providers and authorities.
The inherent challenges with the FATF travel rule are certainly very real ones. For one, it requires buy-in from many virtual asset providers running blockchain projects and exchanges using different technologies. This makes tracking customer information at a granular level more difficult. That said, the benefit of the travel rule will outweigh those challenges. It stretches beyond the typical KYC procedures most crypto service providers follow. KYC relates mostly to an organization’s internal processes. The travel rule is much broader in nature. It pushes both virtual asset providers and governments to be transparent. It aims to go beyond the idea of individual nations subscribing to their own rules surrounding crypto.
Tools that will aid regulators in the near and distant future
The Ontario Securities Commission in Canada recently ruled that cryptocurrency exchange BitMEX, which operates out of the Seychelles Islands, isn’t properly registered to serve residents of the province and thus has to cease accepting new registrations and trades from Ontarians.
More of these kinds of rulings will continue to come out of the woodwork, forcing virtual asset service providers to either adjust and comply, or take on the risks associated with doing business under the radar. The former and not the latter is the better long-term proposition for both crypto businesses and investors alike.
There are several tools — and more are coming — that aid regulators in continuing to develop better frameworks. They allow the average consumer to feel more comfortable with getting into cryptocurrency through any number of properly vetted on-ramps.
Most avid crypto traders are familiar with blockchain explorers — either publicly available or advanced ones being developed by private companies — that aim to dig deeper into the origins of transactions. This gives law enforcement the technology needed to track stolen funds, money laundering and criminal purchases made with crypto. The action of law enforcement adds trust to the ecosystem, making it safer for broad adoption.
Risk-scoring solutions are also being developed that allow market participants, including exchanges and individuals, to see whether counterparty wallets or proposed transactions carry risk. This knowledge will allow exchanges to steer clear of stolen funds, money laundering and bad actors. This again adds trust to the ecosystem.
The future of crypto regulation is happening now
Just in the last few days, the Conference of State Bank Supervisors, a regulatory body representing all U.S. states and territories, has announced the launch of a new regulatory framework for payment companies, money service businesses and cryptocurrency companies. Only Montana, the District of Columbia and Puerto Rico are not included in the launch.
Related: How the US and Europe are regulating crypto in 2020
This new framework requires major payment providers like Western Union, PayPal and 76 other money services and crypto-related businesses to undergo a thorough examination of their AML practices. Altogether, this new framework will regulate payment services that are responsible for transferring over $1 trillion in customer funds annually.
Ultimately, this launch and the broader impact of the FATF travel rule will serve to hold both businesses and market participants accountable for tracking transaction data, engaging in proper KYC protocols, and serving crypto adopters both old and new with added layers of protection that make investing in cryptocurrencies a more welcoming proposition.
Increased regulation and law enforcement is the path leading to exponential increases in the adoption of digital assets both now and in the future. And it is inevitably coming.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.