The sun is starting to set on the days of Wild West crypto

Even as cryptocurrencies have become more widely accepted as an asset class, they have struggled to shed their reputation for inhabiting a digital “Wild West” – a place where law and regulation are s rarely apply.

There are signs, however, that the lawless days of cryptocurrencies are coming to an end. And, as a result, companies trading crypto assets — as well as digital service providers — are scrambling to avoid being taken on by new regulatory requirements.

Cryptocurrency markets have grown rapidly since the start of the coronavirus pandemic, and the value of the industry has regularly topped $2 billion, according to financial authorities.

European Central Bank board member Fabio Panetta told an American audience last month that the crypto market is now bigger than subprime mortgages – $1.3 billion – when it triggered the global financial crisis in 2008.

Fabio Panetta, ECB board member © Alexandros Michailidis/Alamy

He said around 16% of Americans and 10% of Europeans were exposed in some way to cryptocurrencies or related assets – and warned of the potential dangers of a crash scholarship.

Today, the ECB is one of many regulators around the world looking for ways to rein in this previously unsupervised space, where the absence of rules has been both a key attraction and cause for concern.

This has led to a growing number of crypto firms asking for help in complying with growing regulatory demands, says Rachel Woolley of Fenergo, a Dublin-based compliance software company.

“Many virtual asset service companies have met their compliance obligations because they have not done so as effectively as they could have done,” says Woolley, global director of financial crime at Fenergo.

“This idea that you can deliberately violate obligations has to go. The reality is that the regulations [in crypto] will get tighter and there will be fines,” she adds.

Fines and bans are already imposed.

As a basic requirement, regulators want trading platforms and service providers to carry out anti-money laundering checks – a rule that keeps tripping up many.

In April, the U.S. Office of the Comptroller of the Currency issued a cease and desist order against Anchorage Digital Bank, which claimed to be the first federally chartered digital asset bank capable of acting as a custodian and to offer crypto to its customers. But, last month, the licensing watchdog slapped Anchorage with an order to remedy a number of failings, citing a lack of checks in monitoring suspicious activity – including anti-money laundering checks.

In April, the United States Office for the Comptroller of the Currency initiated preliminary cease-and-desist proceedings against Anchorage Digital Bank, which in 2021 became the first federally chartered digital asset bank capable of act as a custodian and offer crypto to its customers. But, last month, the licensing watchdog slapped Anchorage with an order to remedy a number of failings, citing a lack of checks in monitoring suspicious activity – including anti-money laundering checks.

The action is in line with Fenergo’s research findings showing increased targeting of cryptocurrency-related businesses by regulators. The ban is in line with Fenergo’s research findings showing increased targeting of cryptocurrency-related businesses by regulators.

In August last year, trading platform BitMex was forced to pay $100 million in fines to the US Commodity and Futures Trading Association over its failure to pass anti-money laundering checks.

a mobile phone displaying the logo of BitMex, a live trading application

Crypto issues: a mobile phone app for live trading © Alamy

Many crypto companies claim that most industry players want to follow the rules, but the lack of clarity on what is required hampers this effort.

UK regulators have been criticized for slow progress both in registering companies that want to offer digital asset services and in establishing a framework for crypto.

Nikhil Rathi, chief executive of the UK’s Financial Conduct Authority, said last month that the regulator expected more powers to oversee crypto companies beyond basic anti-money laundering requirements. .

He also said the FCA had so far only found 33 companies fit to operate. “Many were rejected because they did not have sufficient provisions to prevent damage, or even identify it in the first place,” he said. “We have to draw clear lines. . . as we have always warned, if you are investing in crypto, you must be prepared to lose all your money.

Legal disputes over digital assets can also present new challenges. Sergey Romanovsky, CEO and founder of Nebeus, a Barcelona-based company that lends money for crypto, found this out the hard way.

His business nearly collapsed under the pressure of a court case alleging the company failed to properly safeguard a customer’s money. The case ended with a ruling in favor of Nebeus, but Romanovsky was hit hard by a court ruling to temporarily freeze the company’s assets, due to a technical misunderstanding.

He argued in a UK court for keeping the $1.5million in question in so-called “cold storage” – on a device similar to a USB drive that secures digital assets by keeping them offline. The court initially found this unacceptable, which led to the freezing order.

“In hindsight, there were simple steps Nebeus should have taken: namely, keeping the alleged fraudulent crypto assets in a format the court would better understand,” Romanovsky says.

Fenergo’s Woolley warns that companies can also fall prey to unexpected regulatory reversals. She says the case against Anchorage is cause for concern because it gives the impression that regulators are flip-flopping.

“I am concerned that the regulators granted the license to Anchorage in January of last year and less than 18 months later they came back to it – the question is why did they grant them a license? license without having these systems in place in the first place? ” asks Woolley. “Those checks should have been there from day one.”

But in addition to protecting against the dangers of money laundering, regulators are now focusing on protecting consumers in crypto transactions. In addition to the UK’s FCA, a group of European financial supervisors agreed in late March that many crypto assets are highly risky and speculative, and subject to “aggressive promotion”.

Many in the crypto industry expect the new regulations to vary from country to country, potentially allowing companies to move to jurisdictions where the rules are more favorable to them.

Ian Mason, head of UK financial services regulation at law firm Gowling WLG, says this potential for regulatory arbitrage is concerning due to the global nature of crypto.

“There needs to be more consistent regulation, so that there are consistent and high standards in crypto markets,” Mason says.

The article was edited to clarify that Anchorage Digital received an order from the OCC to remedy internal controls although the watchdog did not withdraw the bank’s authorization

The digital asset market is reaching fragile new heights

Line chart from Weekly ($tn) showing the total market capitalization of crypto assets

The rapid increase in the total value of all crypto assets demonstrates a growing consumer appetite to hold them as an alternative to traditional currencies and other stores of value, reports Michael Kavanagh.

But the recent huge swings in the asset class’s market capitalization have again shown the dangers of assuming crypto is a one-sided bet.

Since 2017, the market has been marked by huge spikes and dips in total value, reflecting huge volatility in the trading value of bitcoin and rival currencies.

The market value tumbled above $3 billion last November before crashing to nearly $1.6 billion in February and has yet to recover ground.

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