Historically, regulation and crypto seemed to be opposites due to the libertarian stance of the early Bitcoin community and a lack of regulatory guidance and frameworks in the early days of the space. As a new and fast evolving asset class, law makers had difficulties to understand and categorise digital assets in the existing frameworks. Because of these circumstances, many service providers did not allocate a lot of resources and attention on regulatory compliance when starting their operations.
The digital asset space has matured over the last decade and reached a critical size that cannot be ignored by regulators to protect investors. Therefore, regulators have started to create laws and clear legal frameworks on how to deal with digital assets in a compliant manner. Further, the screening of active players in the market in regards to compliance has strongly increased in the last few years.
Increased Regulatory Scrutiny
Many service providers are not fully compliant due to the above-mentioned circumstances of the early crypto space, especially with regards to diligent know your customer (KYC), anti-money laundering (AML) and counter terrorist financing (CTF) processes. This has resulted in various law actions against such players – as the recent cases against prominent service providers such as Binance and BlockFi showcased, not mentioning many other examples in recent months. As regulators have a close eye on the sector and regulation increases, this trend will continue in the next years.
Dangers of using Un(der)regulated Providers
Being fully compliant and having adequate measures for KYC, AML and CTF requires additional resources and expenses for service providers and makes the onboarding and transaction process of investors slower compared to unregulated players. Nevertheless, it is crucial and beneficial for both investors and service providers to go the “extra mile” of compliance.
The past and current cases show that regulators will not shy away from going after even big players such as Binance and BlockFi, and taking harsh action if providers are not fully compliant with regulation. Investors choosing to use the services and products of an unregulated/non-compliant player can be exposed to the following dangers/tradeoffs:
- Investor funds can get confiscated and temporarily blocked by regulators if AML and CTF measures are insufficient, resulting in potential financial losses for investors
- Withdrawals can be halted for crypto assets and/or fiat transactions until a law case is settled which can take longer periods of time where assets are not transferable
- The platform does not meet minimum security standards for the custody of assets and may be targeted by hackers or a malicious actor within who steals investors’ funds with low liability against the platform providers
- Access to a limited range of services as platform providers lack licenses and regulatory approvals to offer services such as security token offerings
When choosing to go with a regulated player, investors can avoid and greatly reduce the probability of the above listed scenarios. The trend of increased regulation and monitoring in the digital assets space is clear and it can be expected that the pressure on unregulated players will increase. Existing providers who want to become compliant will need to get back to their client base and request additional information from the past which is a very cumbersome process in retrospect for investors.
Closing Thoughts
Going for a fully regulated player gives investors peace of mind. The trade-off of a faster onboarding experience can be harsh and unexpected. Especially since regulation will increase more and more worldwide, investors who are interested in a long-term secure service environment should consider using the services of regulated players.
This will not only benefit investors, but increased regulation in the digital asset space will also attract large institutional investors such as hedge funds and pension funds to invest into this young asset class which, driving mass adoption and increasing liquidity as for example in decentralized finance (DeFi).
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