Regulations are not going anywhere. On the contrary, financial service providers face more regulatory challenges and higher costs than ever before. During the early days of cryptocurrencies, a “Wild West” culture emerged when regulators, uncertain on how to tackle this thing called blockchain, paid little attention to the thefts, scams and hacks plaguing the virtual-asset market.
Today, this is no longer the case. No matter their roots, every virtual asset project from Telegram to Shapeshift to Libra is ramping up compliance while regulators continue to issue guidance, enforce regulations and pay closer attention to digital securities platforms, crypto exchanges and other virtual-asset service providers, or VASPs, catering to the residents of their respective jurisdictions. Despite this, many organizations in the blockchain space still face a painful combination of misinformation, opaque legislation and willful ignorance when it comes to fulfilling their obligations in each of the markets they serve.
As the demand for digital tech continues to increase, regulatory compliance has become a competitive advantage and key differentiator for successful fintech and digital-asset platforms. In contrast to the Wild West days in the sector, “compliance” is now the new buzzword when promoting fintech services, with headlines like “the compliant _______ platform” plastered across the websites of digital securities, security tokens, ICOs, FX, OTC, brokers and exchanges.
Unfortunately, calling something compliant does not make it so. The very definition of compliance is not only a moving target, it also includes gray areas such as a “risk-based approach,” which can change massively depending on the nature of one’s business activities and client base. Without defined industry standards for guidelines such as Know Your Customer or Anti-Money Laundering, it is easy to see why VASPs — even those with the size and budgets of Coinbase, Binance or Libra — struggle to maintain a compliant business.
To stay ahead, VASPs must have a clear understanding of their regulatory obligations and how this impacts their business viability in any given market. Avoiding the three most common pitfalls of compliance can shorten a company’s time to market, create barriers to entry for competition, and protect its reputation.
Pitfall 1: KYC means verifying users’ identity during onboarding
This is the biggest misconception that plagues most digital securities platforms, exchanges and other virtual asset service providers in the market today. Knowing your customer is not a one-time thing — you are obligated to keep up-to-date, auditable records for each client for the entire time you serve them.
In many jurisdictions, your record-keeping obligations can extend for years after the client ceases to do business with you. In order to build a robust and scalable business, it is important to account and design for KYC refreshes, ongoing AML screening, transaction…