Regulation

The Regulatory Risks Presented by Crypto Exchanges

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There is a constant battle going on in the cryptocurrency industry over regulation. On one hand, international treaties require exchanges to properly vet users against money laundering and funding of terrorist activities. However, the regulations around this tend to be cumbersome and result in a centralized database that limits the anonymous and censorship resistant nature of cryptocurrencies.

Cryptocurrency Exchanges Acting Rogue

Now it is being reported that a large proportion – potentially up to 70% – of cryptocurrency exchanges don’t have proper know your customer (KYC) procedures in place.

Depending on where the exchanges are domiciled, they could potentially get shut down by governments for violating these laws. Each exchange presents a different level of regulatory risk. This risk is measures by the threshold the exchange sets for when users must fulfill KYC.

Coinbase, Gemini, Poloniex, and Coinsquare are all considered to be on the “low-risk” end of the spectrum, whereas Binance allows up to 2 BTC in withdrawals and deposits before KYC information is required.

Additional issues emerge in regards to the legal structures of many of these platforms. There are often several intermediary parties operating in between the counterparties, which has made it very difficult to properly conduct lawsuits. We saw this play out with the November lawsuit against Bitcoin Market. Jurisdiction could not be confirmed, so the lawsuit was delayed moving forward.

Even if the legal structures are complicated but legitimate, it may throw off potential partnerships with financial institutions. As an industry known for placing an emphasis on doing things by the book, there is no reason for them to take legal risks with these relative unknowns.

Anonymity Has Limits

Finding the balance between the anonymous trading that was promised by the industry and the safety procedures necessary to prevent money laundering from occurring is extremely difficult.

On a deeper level, the question is whether anonymous trading is a good thing if it could potentially put the public’s lives at risk by financing terrorism. AML and KYC laws have their drawbacks and have been shown to be ineffective as well as costly on a worldwide scale. Although better regulations should be put forward, completely ignoring them makes the question point moot. As is generally the case, the answer is likely somewhere in the middle.

Regulations giving approval to cryptocurrencies like Bitcoin are unlikely to come anytime soon, as widespread use of these coins would make it difficult for countries to spend into deficits. Stablecoins, which are fiat-backed, are more likely to receive approvals because of regulators’ familiarity with their monetary policies.

Cryptocurrencies mean that governments have to run even budgets and not spend too much, which is why regulators are so hesitant to move forward with the idea. It is not an idea that has much sway in current times and they don’t know what to do with it.

Right now, the industry has far too much much of a focus on the price of crypto and far too little an emphasis on what it will actually be used for. We’ve discussed how innovation and development is upstream of the price, and usage is as well. Learning to work with regulators and eventually making cryptocurrencies more accessible could prove to be the key to bringing back another crypto boom.

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