Crypto Exchanges Renew Emphasis On Regulatory Compliance

While cryptocurrency has found more mainstream acceptance among consumers, it also has the unfortunate tendency to draw money launderers. According to a PYMNTS AML/KYC Tracker, 2019 saw $2.8 billion laundered through cryptocurrency exchanges — up from $1 billion the year prior.

It’s growth that is easily explained with lax regulation on the exchanges that support cryptocurrency exchange. PYMNTS found that 56 percent of all exchanges had weak or no know your customer (KYC) processes. That has caught the attention of regulators and caused some redefinition of crypto exchanges and some new requirements regarding anti-money laundering (AML) and KYC regulations. In 2019, the Financial Crimes Enforcement Network (FinCEN), the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) issued a joint statement defining cryptocurrency exchanges as money service businesses (MSBs), thus making them subject to AML and KYC regulations under the Bank Secrecy Act.

The outcome for firms of those regulations, identity verification firm Trulioo Chief Operating Officer Zac Cohen said in a conversation with PYMNTS and Hunter Merghart, head of U.S. Operations at crypto exchange Bitstamp, is fairly clear. They will either figure out how to make AML/KYC compliance happen, or they will be fined heavily and face increasingly stringent action to stop their activity. It’s that simple and straightforward.

“What I think is still being formulated and defined is that this is still a nascent industry in many ways,” Cohen said. “And I think we’re seeing the regulations try to evolve and adapt as quickly as possible, but there’s always going to be interpretations. There’s going to be further rules and enactments. This is creating a lot of interesting conversation and debate around what’s the best way to approach these changes and what the most effective ways for firms to comply are.”

Exchange Compliance

Compliance is critical, Merghart said. The priority has to be around trying to embrace regulation “and not trying to maybe get around something.” AML/KYC is not new to the Bitstamp exchange. Since 2015, the exchange has been doing AML/KYC authentication — and unlike some sites that allow users to onboard and start trading, only pulling their privileges back later if an AML/KYC check turns up something suspicious, Bitstamp waits until the consumer is verified before they can start trading. That means the process is an area that is always ripe for improvement and innovation — because turning that time frame around quickly is critical.

“We’ve automated a lot of that process, and we try to turn it around very quickly, especially as regulation gets a little bit more stringent, trying to automate it as much as possible to cut down on any of that manual review that does need to happen,” Merghart said.” This allows us to streamline the top of funnel flow, which is [increasingly] the most important thing as the industry continues to expand globally.”

The companies that will be successful in the growing and increasingly global crypto landscape, the executives noted, are the ones that will embrace technology and automation to the point where they can create a seamless end-user experience that is also fully compliant. To do that well, Merghart and Cohen agreed, means more than being able to respond to regulatory changes quickly, but to be ever ready for what’s coming next as the space continues to innovate.

Bitstamp, for example, has adopted stringent AML/KYC authenticating. Currently, Merghart said, it is going a step further with IP address tracking and geolocation to be certain that clients are only using products allowed to them in the jurisdiction where they are actually located.

Crypto-Pressure Intensifies

And, Cohen said, the pressure to stay ahead and evolve isn’t going away — if anything it is likely going to intensify as cryptocurrencies gain more ground in mainstream consciousness. But as much as a challenge as it will present to the industry, it wlil also create an opportunity for innovation — for both the exchanges themselves and for firms like Trulioo that build the technology these firms need to live up to the regulatory responsibility without that activity becoming overwhelming.

“The one consistent thing that we know is the industry is going to evolve,” Cohen said.  “And really what the mainstream acceptance in many ways of cryptocurrency and crypto exchanges tell us is we will clearly see a continuing path that compares them to [money service providers (MSPs)].”

Trulioo has spent a decade building its AML/KYC solution for business, developing different types of programs that can be operationalized and automated in a seamless way. The goal for crypto exchanges is ultimately what it is for any financial services player — to find ways to carry out knowing their customer that doesn’t ruin the consumer experience, Cohen said. What the regulated entities want is to focus on what they do best, finding a partner to allow them to do that and still manage to adapt with the changing regulatory environment.

Both men agreed that the environment is only going to get more active going forward, and it is likely to draw more regulatory interest. More rule changes are almost certainly coming down the pike. But it’s possible to prepare and even optimize for that long before it happens, for players ready to think strategically ahead.

“There’s a whole interaction and entire workflow that you really need to assess as a system,” Cohen said. “That initial point in time is critical. That’s when you’re usually collecting information, creating an account. You want to make sure that that part of the program is tight. But really it’s up to the organization to determine how it is best suited to operate that workflow in light of the current landscape or regulations and obligations they particularly have.”