2 minute read 3 Nov 2021
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How to ensure compliance and control in cryptocurrency

By Walid Raad

EY Americas Forensic & Integrity Services Financial Services Leader

Dedicated to finding innovative solutions to complex problems by cultivating our diverse team of professionals. Foodie. Loves travel. Husband. Father. Mentor.

2 minute read 3 Nov 2021

As cryptocurrency and blockchain technology continue to become more integrated, regulations and regulatory scrutiny continue to progress.

The only way that blockchains will deliver upon their true promise to the world is if public blockchain networks are the preferred path for enterprises and investors.
Paul R. Brody
EY Global Blockchain Leader

Navigating challenges unique to the Financial Services industry 

1. Proper classification of the different ranges of cryptocurrencies

  • Various US regulators and states have devised unique approaches to address and regulate cryptocurrencies, but a cohesive framework of regulation has yet to be created, and governments continue to struggle to address the nuances of the various cryptocurrencies across the globe.

2. Cryptocurrency as money

  • In certain instances, US regulators have avoided classifying cryptocurrency as “money,” referring to it rather as crypto assets. Developers of coins attempting to provide an alternative to money have launched “stablecoins,” which are crypto-currencies that are fully backed by fiat currency, making them a suitable alternative to traditional money and bringing the industry closer to unavoidable regulatory intervention.

3. Transition from traditional markets to markets of the future

  • US regulators have historically leveraged existing regulations and guidelines to respond quickly to developments in the market under the philosophy that activities performing the same function should be treated under the same set of rules. As a result, many US regulators across various US states and jurisdictions use rules from existing laws for securities investments regarding cryptocurrencies and tokens.
  • Because the crypto asset space changes rapidly and the functions are continuously shifting and expanding, the institutions participating in crypto activities and associated US regulators ultimately will likely need to create entirely new structures to respond to the industry.  

4. Classifying investors

  • Traditionally, US regulators classify investors based on metrics, including indicators such as wealth, deal size and legal status. This has typically applied to the primary market rather than secondary markets. This poses issues with investors operating in decentralized markets.

5. Relying on intermediaries

  • Self-custody using personal cryptocurrency wallets eliminates intermediaries, which is a core component of securities regulation.

6. Criminal activity

  • Cryptocurrencies pose a threat when it comes to money laundering, tax evasion and other criminal activities. However, the manners in which they may be manipulated are still evolving and can be different than fiat currency because of their properties. Nonetheless, cryptocurrencies, like other more traditional forms of currency, are susceptible to criminal exploitation.

Summary

Compliance missteps can be costly and hinder the progress of growing organizations, potentially determining the success or failure of a crypto-involved business during this turbulent period. It is imperative that the issuers and trading platforms of crypto assets are flexible and adaptable as the legal requirements and regulatory frameworks are ever evolving. Addressing these compliance issues and taking full advantage of the available technology and expertise is vital to successfully navigating the cryptocurrency and blockchain world.

About this article

By Walid Raad

EY Americas Forensic & Integrity Services Financial Services Leader

Dedicated to finding innovative solutions to complex problems by cultivating our diverse team of professionals. Foodie. Loves travel. Husband. Father. Mentor.

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