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After Sam Bankman-Fried’s FTX and its affiliates crashed, financial regulators around the world had to turn their attention to two places at once. One eye is firmly on the exclusion of terrorist financing, while the other is on FTX’s impact among retail investors and its ripple effects across the larger financial landscape.
There will be many more crossover moments as litigators introduce new and evolving legal frameworks, and as fintech companies must comply. Whether it’s still just part of the horizon or looming large, this law is inevitable, but what shape will it take?
rise in temperature
Long before the US$8 billion FTX deposit disappeared, legislators in some regions were planning to heat up cryptocurrency retailers. In fact, he is one of the major regions where legislation was enacted. won’t Affected by the Alameda Research/FTX fallout is the European Union, which has already written and signed Crypto Asset Market (MiCA) regulations designed to protect consumers in such incidents. However, it is not yet implemented. MiCA will be discussed later.
Of course, major exchanges such as Binance US and Coinbase have already undergone intense scrutiny to comply with Know-Your-Customer (KYC) and Anti-Money Laundering (AML) regulations, so some overheating I was used to it. Compliance teams were accustomed to legal language that understood both the need for a low-friction user experience and the challenges associated with some aspects of AML enforcement. That wording lured some companies to the looser side of due diligence. Coinbase was recently fined US$100 million by New York regulators for violating AML, so at least he said Coinbase would probably be better prepared if regulations like MiCA were lifted. You’re done.
For Decentralized Finance (DeFi) Enterprises coercion Fixing leaks on board presents a clear challenge. Either protect your customers or get used to more severe legal weather. Even if she is new to the AML environment.
first drizzle
At the end of a turbulent 2022, regulatory frameworks in most major markets were still coalescing. Like light rain that promises high winds and heavy rains, you can keep an eye on these to see what happens later in the year.
Some jurisdictions, such as Singapore, had already implemented modest control mechanisms, primarily concerned with complying with Financial Action Task Force AML guidelines and avoiding sanctions. Meanwhile, India has ratified her 30% tax on all crypto assets profits in April 2022.
However, little is currently enforced in crypto-specific language when it comes to protecting retail customers against looting, fraud and embezzlement.
One of the first major implementations, MiCA was first proposed to the European Union Parliament in November 2020 to provide legal confidence in a notoriously volatile field. It was signed into law in October 2022, but businesses won’t need to be fully compliant until mid-2024.
As you can see at a glance, MiCA does the following:
- Establish one definition of “crypto assets” in the European Union.
- Define blockchain industries that fall outside this jurisdiction, such as insurance companies and pension providers.
- Create four categories in which assets fall: asset reference tokens, electronic money tokens, utility tokens, and everything else.
- Establish enforceable mandates for how stablecoins and non-stablecoins are brought to market and subsequently made available to the public. This includes disclosure laws modeled after the EU Prospectus Regulation.
- Under MiFiD (Market of Financial Instruments Directive), it regulates how cryptocurrency services are authorized to conduct business as usual.
Similarly, the aforementioned Singapore regulations were careful about which Digital Payment Token Service Providers (DPTSPs) can be trusted with a license to operate in the country. Most recently, the Monetary Authority of Singapore made proposals to implement customer safety and anti-corruption protocols among licensees.
The proposed Singapore system contains details more suited to its size and culture, but establishes a good benchmark that other regions may follow.
- The DPTSP must conduct a customer risk perception assessment.
- DPTSP should not offer incentives to individual investors (like online casinos do).
- Individual customers should be prevented from borrowing money to invest in DeFi assets.
- DPTSP must ensure that investor funds are kept separate from company funds.
- Self-detection and reporting of internal conflicts of interest.
- Crypto company transparency on how to invest in new assets.
- Adequate customer service infrastructure.
- A mandatory emergency backup of your critical operating system.
As other regions struggle to sew consumer safety into their security blankets, these regions are likely to serve as many models.
Ominous clouds and lightning danger
As the footsteps of 300 recruits can be heard stomping in the Criminal Division of the U.S. Internal Revenue Service, one wonders if their boots will be weatherproof against the coming storm. Alongside apparently “hundreds” of cases created by the IRS against crypto tax evaders, a precedent-setting lawsuit is waiting to drop the gavel on the crypto space. Depending on how they are resolved, many in the industry see them as pivotal in shaping the future of DeFi.
Until now, investing in decentralized currencies of any kind has by definition been an investment in a low scrutiny environment. The idea of privacy, or staying “off the grid,” is a no-brainer when it comes to much of the DeFi community. paid for and provided.
while writing for Forst, Michael Shing points out that this creates an edge-to-edge situation in terms of liability for negligence. If almost all customers connect under pseudonyms but some are criminals, where does the legal punishment go? Under the current legal framework, exchange operators and owners There is no choice but to shift the responsibility to
precedent hail
There are three lawsuits currently under discussion where this friction caused an electrical buildup and subsequent lightning strikes: FTX, Coinbase, and Ripple.
Where lack of compliance controls allows operators to obfuscate their own transactions. probably As in the case of Sam Bankman-Fried’s FTX and Alameda Research, regulation makes sense to create a safer and more accountable space for everyday commerce. SBF made it clear.
In terms of how customers will be affected by this, New York legislators say Coinbase is doing the bare minimum in terms of enforcing customers to comply with its KYC obligations. Some businesses that need to comply with KYC use alternative data sources, such as social media credit scoring, to minimize friction for trusted users. Dynamic friction when stepping up or registering. This $100 million mistake of his will force Coinbase to re-evaluate its risk appetite and onboarding process, possibly pulling part of the mainstream crypto market. Expect the customer due diligence (CDD) practices that Coinbase is currently implementing to be reflected worldwide.
Finally, many crypto pundits are applying the impending ruling of the U.S. Securities and Exchange Commission v. Ripple (XRP) case to the future of the entire crypto landscape. That case will determine whether a crypto asset is a currency or a security, the latter of which falls within the legal framework, with more regulation already on the books.
A perfect storm of legal complications
The upcoming calendar year could be the most tumultuous yet in terms of the storms to come and how the cryptocurrency business will stay dry.
Legislators have turbulent boiling seas to navigate, and their ships don’t seem fit for sailing these days. After all, these kinds of virtual financial instruments are complicated to understand and the circumstances surrounding them include:
- SBF’s greed that (reportedly) destroyed the larger DeFi ecosystem.
- Sanctioned and aggressive Russia invested heavily in cryptocurrencies after the wartime ruble crash and announced plans for a nationalized cryptocurrency exchange.
- Companies are increasingly being relegated to jurisdictions with looser or at least tighter oversight, with some countries losing out on taxes and economic boosts.
- Many world governments are planning to release their own Central Bank Digital Currencies (CBDC).
Knowing this situation makes sense for some of the SEC and other governing bodies to be hesitant. Before we can draw hard lines to shape the future of the crypto space, we need to check our balances and finalize our calculations. But for cryptocurrency operators, it remains to be seen whether regulators will allow lighter regulation to keep their heads above water, or sink everything and worry about enforcement when everything goes to the bottom.
Conclusion
Creating a set of laws that set the boundaries of such a choppy sea seems like a monumental task. The Governing Body is still discovering where it needs to step and how hard it will be.
With the conversation heating up over crypto regulation and the most salacious examples of crypto culture being put on display in the media, it’s hard to say which side of the debate is moving forward. Human greed is getting more headlines these days, as is regulatory safety demands, although it’s clear that this will lead to lower profit margins.
As financial legislators around the world balance economic prosperity with not funding wars and protecting their citizens, whatever conclusions they reach, from a due diligence standpoint It looks like a step needs to be taken. DeFi traders would be wise to try to be compliant or lobby for deregulation. , the rower may decide to abandon ship and take other programming jobs.
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