Regulators get tough on financial crime in the crypto sector

The collapse of FTX along with multiple firms accompanied by increasing levels of financial crime has provided the catalyst for the UK and other world governments to seek greater regulation of the crypto sector. The front runners on new moves to impose more robust crypto regulations are the US and UK in an attempt to curb the sector’s vulnerability to financial crime.  According to the Financial Conduct Authority (FCA) 85% of crypto firms were unable to demonstrate that they could meet the minimum standards required for registration under the FCA’s anti-money laundering and counter-terrorist financing regime.

This led to the recent announcement by the UK government that it intends to make the failure to prevent fraud a criminal offence has brought this ever-present menace into sharp focus. Prison sentences for fraud have been making the headlines, while a new report has revealed how the Wirecard fraud was flagged up by a whistleblower some four years before the firm’s demise, but the warning went unheeded.

The fight against financial crime starts with the implementation of a compliance-focused culture within the crypto sector. Firms must have a robust approach in mitigating exposure to financial crime. By prioritizing compliance as a fundamental pillar of how crypto firms operate, firms will help change perceptions among regulators, law enforcement and traditional finance.

However, buy-in must be achieved at all levels within a firm, supported by a strong tone from the top. This partly depends on refining the image of the sector away from “crypto bros” and profit before ethics. Philosophical debates about decentralization will not cut the mustard with regulators.

Without such firm-wide backing for compliance, the best systems, policies and controls will be washed away, heightening the risk of illicit proceeds getting into the system. The crypto-asset industry is in a good position to advocate and promote best practices internally, with the external benefit of assuaging broader concerns.

Firms must actively seek practical solutions to prove their commitment. The sector has the opportunity to make a moral commitment to tackling the personal and societal harms inflicted by financial crime when it is enabled by crypto-asset technology – a crypto constitution, if you will.

Practical Steps

  1. Cultural change implemented by training and awareness building, an informed understanding of financial crime threats and a campaign to develop industry standards.
  2. A strong cross-sector statement outlining the policy (and all-important redlines) for dealing with crypto mixers and privacy coins.
  3. Consider the inherent advantages open to crypto assets – the immutability of the blockchain, its inherent traceability and a distributed ledger that can withstand criminal efforts to double-spend legitimate coins. These built-in advantages should bode well compared with repeated traditional finance scandals.

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