How Can Cryptocurrency Funds Manage Compliance Effectively?
In the last two years, no financial vehicle has generated the level of hype and attention as cryptocurrencies.
More and more crypto funds are popping up every day, with several leading investment funds already providing crypto-focused products for their clients. More importantly, the rise in crypto funds has paved the way for institutional investors to enter the scene, which is beneficial for the blockchain industry both growth and exposure-wise.
However, crypto funds remain under the watchful eyes of regulators as cryptoassets continue the battle to establish themselves as mainstream financial assets. As cryptoasset regulations change over time, crypto funds must ensure they keep up with the latest updates to maintain compliance in their offerings. This is the biggest challenge all crypto funds face in their operations, at least for the foreseeable future.
What should cryptocurrency funds know about managing compliance effectively for the year 2020 and beyond?
Why Managing Compliance is the Number One Priority for Cryptocurrency Funds
The decentralized nature of cryptocurrencies provides many benefits to businesses and end-users. One area where it shines is in providing cheap, secure, and efficient financial services to individuals all over the world.
Unfortunately, the pseudonymity of crypto transactions has been exploited in numerous criminal activities, most notably in cases of money laundering and processing illicit transactions. To solve this issue, government bodies and regulators have imposed stringent rules on cryptocurrency transactions — many of which directly affect crypto funds.
Despite the added hassle, regulations are important as they protect users by cutting down on fraudulent and criminal activities involving cryptocurrencies. Crypto funds must adhere to these rules in order to maintain customer security and uphold the wellbeing of their client funds and business operations.
Crypto regulations vary between countries and operating areas. That said, most of them contain the same set of guidelines including:
- Verifying the identities of the sender and receiver for every transaction
- Performing risk assessment and due diligence
- Recording user transaction histories
- Auditing business finances and internal operations
- Providing compliance training and awareness programs
Ensuring foolproof security is not the only reason to maintain compliance. By complying with regulations, crypto funds are able to attract more institutional clients due to the increased investor confidence from running a compliant business. It will take time for crypto funds to be fully compliant, but the effort will definitely be worth it down the line as the cryptoasset space matures.
The Costly Risks of Non-Compliance
The biggest risk of non-compliance comes from the hefty fines given by regulators. Crypto funds should expect to fork out millions at the minimum if they’re found guilty of not complying with regulations in their operating areas.
High-profile cases in the last two years have shown that non-compliance can be damaging even to the most successful of crypto funds. BTC-e, a Russian exchange, was fined $100 million by FinCEN for violating regulations in managing user funds. In December 2018, California-based cryptocurrency fund, CoinAlpha, was slapped with a $50,000 penalty and a cease and desist order for not having adequate anti-money laundering (AML) measures.
Non-compliance also poses major security threats considering regulations include security guidelines that protect both consumers and businesses. Fraud (e.g. insider theft) and security breaches cost the blockchain industry a staggering $4.26 billion this year, leading to massive losses among investors and companies.
Crypto funds cannot afford to throw away millions of dollars to fines and hacks as operating margins in the industry are extremely tight. One non-compliance penalty could lead to heavy debts or worse, the business shutting down shop if it cannot recover from the loss.
4 Key Compliance Guidelines Crypto Funds Should Consider
1. Maintain Transactional Transparency
One of FinCEN’s (and other established bodies’) main guidelines is that every business in the crypto industry must maintain transparent records of customer activity. Both incoming and outgoing transactions must be tracked.
This is achieved by using public blockchains that allow all transaction details to be viewed without restrictions. Crypto funds should also implement AML procedures in their customer-facing products and services to enable the tracking of customer transaction histories.
Another rule to keep in mind for crypto funds in the US is FinCEN’s Funds Travel Rule. The rule states that for any transactions worth $3,000 or more, businesses must disclose the identities of the sender and receiver to the recipient institution. It’s important for crypto funds to be aware of this rule since many transactions in the space are worth hundreds of thousands, if not millions.
2. A Dedicated Compliance Team Is Necessary
With regulation changes happening left and right, crypto funds can no longer rely on multi-role employees to ensure compliance in business operations. Now is the time for companies to invest in a department committed to managing crypto compliance matters.
A dedicated compliance team, combined with comprehensive AML procedures as well as other anti-crime controls will put crypto funds in a good place with regulations.
If an in-house compliance team is out of the question, crypto funds are advised to develop partnerships with trusted external firms that can provide due diligence and compliance management for blockchain companies.
3. Be Extra Cautious When Dealing with Client Privacy
The General Data Protection Regulation (GDPR) has been in effect for over a year now, but that doesn’t mean crypto funds should let their guards down when dealing with user privacy.
Privacy-focused regulations are constantly revamped to accommodate changing landscapes. As a result, blockchain companies need to be extra aware when handling the personal data of their customers. GDPR, for example, has received several updates since it was first implemented back in 2018.
For starters, KYC/AML checks must come with a request for the subject’s consent before any action can be taken. Permission must be explicitly granted by the subject through clear, easy to comprehend requests. Consent requests that are vague and misleading are a major violation of GDPR — or any customer privacy regulations for that matter.
Sensitive data must be kept safe and away from unauthorized parties. This can be achieved through the use of industry-grade disk storage and data encryption. Bear in mind that customers also need to be made aware of their data privacy rights. In short, they have the right to read, modify, or request the deletion of all personal data collected by crypto funds.
4. Perform Routine Risk Assessments and Audits
Performing routine risk assessment and internal audits is another key factor in maintaining total compliance, especially among crypto funds where millions of dollars are exchanged between accounts every day.
Crypto funds should regularly assess client transactions to prevent themselves from being involved in criminal risks like money laundering and facilitating illicit deals. Internal audits also keep crypto funds on their toes since team members have a thorough overview of what needs to be improved internally in terms of maintaining compliance.
How Does Blue Swan Grading Help Crypto Funds Maintain Compliance?
Keeping up with the latest regulations and compliance updates in the crypto space can be resource-consuming for crypto funds who have more important tasks on their hands.
This is where the right crypto market intelligence system comes in handy. A professional-grade, multi-channel big data platform like Blue Swan gives investors everything they need to know about the latest regulation updates and news in the industry to better manage client funds.
Blue Swan Grading benefits investors immensely by offering a comprehensive crypto analytical framework that aggregates and analyzes essential data from a diversity of sources, offering a comprehensive market overview.
Blue Swan does everything from analyzing news and media coverage to assessing project development status. The platform also takes into account the skills and reputations of the teams behind crypto projects while keeping up with their regulatory compliance (or lack thereof). In short, the platform offers unbiased market analysis and project ratings and classifications that investors need, allowing them to make faster and smarter trading decisions.
Blue Swan Grading also offers API tools and customizable features for developers to make full use of the platform.
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