The Evolution of Cryptocurrency Regulation
The landscape of the cryptocurrency sector has evolved considerably, especially with respect to regulatory adherence, as noted by James Smith, co-founder of the compliance-focused firm Elliptic. Speaking at the Token2049 conference, Smith reflected on the early stages of the industry, where very few companies prioritized compliance. He pointed out that Coinbase was a notable exception, becoming Elliptic’s first client back when they were established in 2013, recognizing the importance of compliance from the outset.
Government and Institutional Influence
The shift towards stronger regulatory frameworks gained momentum as governmental bodies, particularly in New York, intensified their focus on the cryptocurrency domain. Additionally, the involvement of well-established financial players such as Fidelity and DBS Bank marked a pivotal change, as these institutions entered the crypto scene with stringent compliance demands shaped by their experiences in traditional finance. For example, Fidelity launched its inaugural crypto service in 2019, while DBS Bank introduced its digital exchange aimed at accredited and institutional investors in 2020.
Transformations and Challenges in Compliance
According to Smith, there’s been a noticeable transformation in recent years, as global exchanges increasingly recognize the importance of compliance to integrate into an international ecosystem. However, regulatory efforts are particularly concentrated on crypto exchanges and peer-to-peer platforms, which are viewed as critical points for implementing Anti-Money Laundering (AML) measures and enhancing financial oversight. Despite being prime targets for high-profile hacks and money laundering, as exemplified by tactics employed by the Lazarus Group, compliance measures are still developing.
The recent security breach involving Bybit illustrates these challenges. The Lazarus Group executed an intricate money laundering operation to divert pilfered funds by converting low-liquidity tokens into Ether, and subsequently into Bitcoin using decentralized exchanges that do not require Know Your Customer (KYC) checks.
Smith expressed concern about the ease with which such operations can occur, highlighting that even after the stolen funds were flagged, they continued to circulate on decentralized platforms due to significant liquidity. He stressed the necessity for those facilitating liquidity to enhance their scrutiny of the origins and destinations of funds, suggesting that investigating the profit makers in these protocols could provide a starting point for implementing effective controls.
