Digital Asset Securities at risk – Why Crypto Compliance is important
- April 1, 2023
The SEC’s Examination Division issued a warning that focused on the findings of recent examinations of broker-dealers, investment advisers, exchanges and transfer agents. This alert indicated that digital asset securities can present considerable risks; furthermore, firms were advised to adjust their compliance programs to account for these dangers. Cryptocurrency companies remain a hot topic as regulators and enforcers strive to control the risks associated with this rising industry, such as their concentrated efforts towards creating beneficial compliance programs. The New York State Department of Financial Services (NYSDFS) recently declared its resolution to the exploration into Coinbase’s cryptocurrency trading platform. It appears that regulatory bodies will continue to monitor cryptocurrency protocols for any compliance violations in order to guarantee a secure online environment.
With an estimated $14 billion attributed to illicit cryptocurrency transactions, governments and regulatory authorities are developing comprehensive measures for cryptocurrency compliance. By doing so, they aim to ensure that investors’ funds remain safe and secure. These updated regulations surrounding crypto-compliance could prove invaluable in protecting against potential financial losses or fraud.
It is important to point out that there are no explicit rules and regulations for cryptocurrencies. Institutions around the world have adopted unique frameworks when it comes to cryptocurrency regulation, each one with its own set of data and methodologies. The U.S. Securities and Exchange Commission (SEC) is a key participant in cryptocurrency compliance, recognizing cryptocurrencies as either money, cash equivalents or securities. Recently, the SEC declared that asset custody will be regulated independently from registration and regulation of crypto exchanges. In addition to this declaration, it was also communicated by SEC that they are working hand-in-hand with the Commodity Futures Trading Commission (CFTC), establishing unified rules for trading platforms dealing with cryptocurrencies.
Financial Crimes Enforcement Network (FinCEN) is another. Not only is FinCEN categorizing cryptocurrencies as money service businesses and therefore subjecting them to applicable regulations, they are also insisting on cryptocurrency providers establishing an AML compliance program and obtaining the proper license. Moreover, it’s mandatory for these companies to maintain records as well as provide timely reports to pertinent authorities according to FinCEN’s orders.
Cryptocurrency, like any other financial instrument, can be manipulated for money laundering or terrorist activities. To address this risk, crypto companies must endeavor to understand AML/CFT compliance in their sector and collaborate with regulators to define what it looks like in the current and future crypto space. Let’s take a look at some best practices for cryptocurrency compliance:
1. Know Your Customer
The first step in cryptocurrency compliance is to know your customer. When you accept cryptocurrency as payment, you are essentially entering into a financial transaction with an individual or entity. You have a responsibility to verify the identity of the person or entity you are dealing with to the best of your ability. This means collecting and verifying information such as name, address, date of birth, and other identifying information. The more information you have about your customer, the better able you will be to comply with anti-money laundering (AML) regulations.
2. Comply with AML Regulations
AML regulations are designed to prevent criminal activity such as money laundering and terrorism financing. When you accept cryptocurrency as payment, you must take steps to ensure compliance with AML regulations. This includes reporting any suspicious activity to the relevant authorities and maintaining records of all transactions. Failure to comply with AML regulations can result in heavy fines and even prison time.
3. Understand the Risks Associated with Cryptocurrency Transactions
Cryptocurrency transactions come with a unique set of risks that must be understood and managed in order to maintain compliance. These risks include but are not limited to fraud, hacking, and market volatility. When accepting cryptocurrency as payment, you should have systems and controls in place to mitigate these risks. For example, you may want to consider using a reputable third-party service to handle cryptocurrency transactions on your behalf.
4. Keep Detailed Records of All Transactions
Another important aspect of cryptocurrency compliance is keeping detailed records of all transactions. These records should include the date, time, amount, and type of currency involved in each transaction. Record keeping is essential for both tax purposes and detecting suspicious activity. If you do not keep accurate records of your transactions, you may face penalties from regulatory authorities.
5. Seek Professional Help if Necessary
Maintaining cryptocurrency compliance can be a complex and time-consuming task. If you do not have the internal resources available to adequately manage compliance risks, seek professional help from a qualified law firm specializing in this area.
At Global Legal Law Firm, our lawyers are familiar with the rapidly changing nature of electronic payments processing processors, and the ever changing regulations involved, with decades of expertise in ISOs, commercial collections, credit card brands, and other forms of electronic payment processing litigation. Let us guide you through this new and volatile environment, rather than attempting to navigate it on your own.
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