On January 9, the news website Axios ran an item which said out loud what a lot of people had privately thought. Thanks to the negative digital asset/crypto news in late 2022, the digital asset financial sector is now likely to have to deal with markedly increased compliance costs.
The torrent of new regulation is likely to have significant impact on the whole industry: the exchanges, participating firms, and the markets in which they operate. At this point, both federal and state regulators have heightened their focus on digital assets. On the Federal front alone, the Department of Justice, the Securities and Exchange Commission (SEC,) the Commodity Futures Trading Commission (CFTC,) and the Treasury Department all have digital asset business practices in their sights.
And they’ve done so even as they’re faced with company-wide layoffs. To give you a sense of why, here’s a recent example of a significant compliance gap. Coinbase, the U.S.'s largest centralized crypto exchange, agreed to a $100 million settlement with New York state regulators over accusations they had failed to conduct sufficient background checks when they opened new customer accounts. The company paid $50 million as a fine and pledged the other $50 million toward a promise to put stronger and more comprehensive compliance in place.
Until now, the digital asset industry has only been required to follow a few things. The exchanges must adhere to anti-money laundering (AML) rules, which require them to conduct know-your-customer (KYC) verification. And as far back as 2013, the Financial Crimes Enforcement Network began to require digital asset firms to follow the Bank Secrecy Act (BSA).
Specifically, the work to check customer identities and identify potentially suspicious transaction activity. This is the same way banks and traditional financial services firms typically perform these activities. Some firms will even develop and deploy their own regulatory technology so they can avoid having to send customer data to third-party service providers.
However, these same firms still typically still have teams of compliance experts who can also analyze and investigate blockchain-based transactions. And the need for these experts fluctuates based on the activity load.
Not surprisingly, thanks to the recent FTX collapse and the rash of related Chapter 11 filings, the bigger digital asset shops have taken steps to shore up their perceived regulatory professionalism. It’s a way to demonstrate their good intentions. "Compliance is critical to create trust among the industry, regulators, and customers, said Paul Grewal, Coinbase's Chief Legal Officer. "Maintaining high compliance standards can also be a competitive advantage, allowing companies like Coinbase to obtain licenses and operate in highly regulated markets that are not open to our competitors."
However, investment in compliance isn't immune to economic realities. There’s always a give-and-take in compliance resources. In bull markets, more resources are available. In tougher markets, there are likely to be across-the-board staff cuts. And general mandatory standards like AML activities have to be in place no matter what external market conditions prevail. Solid compliance requires people, case management, and a reporting mechanism. It’s simply a cost of doing business.
It’s a direct path to create a safe, easy way for customers or members to buy, hold, or sell digital assets. When you make it possible, your account holders will know the security of participating in digital currency within their primary financial relationship. What more could they – or you – want?
If you want to know more about what Sequoir does, and how they can do it for you, contact them today. They can show you how your financial institution can remain relevant and take advantage of the digital asset revolution! Visit www.sequoir.com today.
Based in Green Bay, WI, Sequoir is a leading provider of digital asset solutions to financial institutions. Sequoir offers pre-built integrations to enable users to buy, hold, sell, or borrow against digital assets. Sequoir also enables financial institutions to offer custom digital asset solutions to its customers or members.