Decentralized tech encourages capital movement, but are regulation and compliance needed to ensure trust?
Blockchain and cryptocurrency were conceptualized as a decentralized technology — something that would ideally render centralized trust platforms unnecessary for users to enjoy the benefits of tech platforms and digital assets. Having a “trustless” trust mechanism, there needs to be no established central or third-party intermediaries to ensure the integrity of transactions.
However, therein also lies the weakness of blockchain. While the technology supposedly circumvents centralized authorities, it also opens itself to the potential for abuse — hence, in the early days, illicit use had been one of the drawbacks of blockchain tech, and it still is one of the concerns to date.
Meanwhile, use of “hot” or online wallets is prone to man-in-the-middle and brute force vulnerabilities — even private keys can now be derived by bots or even old-fashioned trial-and-error computing using certain transaction records.
According to a CipherTrace report (cited by Cointelegraph), 2019 saw around US$4.4 billion in crypto assets lost or stolen.
Thus, while blockchains and cryptocurrency are secure platforms in themselves, the potential for abuse, illicit use, and vulnerabilities, has been a limiting factor in its adoption.
Therefore, counter-intuitive as it may seem, increased regulation and compliance may actually be the one thing that will enable better adoption of blockchain technology, both for individual end-user and institutional users. This becomes especially true with the fiduciary nature of crypto — meaning digital assets are already being used as a means of exchanging payments and value, investing, and even establishing ownership of real-world assets.
Growing pains amid risks
One thing to point out here: Even while blockchains are inherently safe and secure, it is not immune to cyber attacks, which can take advantage of weaknesses in the chain of security. This especially includes human vulnerabilities (phishing, spoofing), although sometimes the infrastructure can be infiltrated, such as by stealing wallets from vulnerable exchanges.
Topp Jirayut Srupsrisopa, Co-Founder and Group CEO, Bitkub, Thailand’s licensed digital assets exchange, cites some of the potential challenges, especially in the context of crypto exchanges:
“Operational challenges and risk factors occur, to wit: IT security/hacking, deteriorating banking relationships, fraud, regulation, competitors/business model risk, reputation risk, AML/KYC enforcement, insufficient demand for services and lack of talents.”
He cites how regulation will benefit the ecosystem:
“Improved stability will affect trade, exchange and investment in a sense that it will further push cryptocurrency forward, foster a greater faith to digital technology, design activities, organize events, and act as an accelerator for blockchain projects.”
Standards will encourage adoption
Having established regional or global standards results in an environment that is more conducive for established businesses to take advantage of emerging technologies. Alexandre Kech, Co-Founder and CEO at Onchain Custodian, says:
“Regulation is sometimes perceived as a bad thing. I disagree. If properly done, it increases the trust in the industry you operate in. It unlocks institutional money. It enables mass adoption.”
He adds: “The challenge we are currently confronted [with] is the lack of clarity and the inconsistency of the regulations across different countries. Either there is no regulation at all or the regulators try to apply existing regulations that sometimes are not fit for purpose.”
Global standards toward a new internet
One of the main tenets of blockchain is its pseudo-anonymous nature, which opens it to possible abuse in terms of money laundering.
This leads to the need for accepted guidelines, such as the Financial Action Task Force’s guidelines on establishing due diligence against using cryptocurrency — including stablecoins — for money laundering or in financing terrorism. Another emerging guideline is the fifth Anti-Money Laundering directive in the European Union, or AML5, which establishes a unique digital space for client identification in the financial sector. This is in opposition to the fragmented digital ID systems currently in place.
“Currently exchanges don’t have infrastructure in place to comply with FATF rules; so the demands for these services will increase. But right now there’s a lot of building solutions for this, and hoping/awaiting big players and unicorns to enter this market,” says Anatoly Ressin, Chief Blockchain Architect at blockchain analytics firm PARSIQ, a platform that provides monitoring and compliance tools for blockchain and digital asset companies.
Ressin adds:
“The problem is the market is global, and when regulations come in place in time, most of these companies will have to rebuild their structures from scratch to become compliant.”
Gregory Klumov, Co-Founder and CEO at STASIS, a company that provides a full-service asset digitization platform, highlights the importance of these emerging regulations in safeguarding decentralized platforms against fraudulent or illicit use:
“What is really helpful is the insurance that is related to a centralized custodian service or product. The main interesting part of AML5 is that it specifically included digital asset businesses like exchanges. And it classifies all digital asset related businesses into two major segments: non-custodial and custodial. AML5 clearly clearly states that all custodial services that offer such service to blockchain users should do complete KYC check on customers.”
Technological innovation towards evolution
Klumov concludes by highlighting the main benefits of better structure in decentralized tech:
“There’ll be transparency, clarity and clear position by the regulators available to the market participants. There’ll be more adoption and entrepreneurship will happen and propel this industry to the next level. But I totally believe this is sort of the Internet 3.0. This is that next cycle of our technological evolution as a humanity as a society and the next breakthrough, the next cycle of this adoption is very close.”
Kech concludes with an optimistic view for global standardization in blockchain and cryptocurrency use: “Some countries are attempting to adopt dedicated approaches to digital assets. Hopefully, the years to come will see some level of harmonization and clarity.”
We are at the cusp of a new internet, indeed — but we need to effectively bridge together these innovative and emerging technologies with real-world financial applications that require safety measures in the light of potential illicit use.
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Topp Jirayut Srupsrisopa is Co-Founder and Group Chief Executive Officer at Bitkub, Thailand’s licensed digital assets exchange. Topp has dedicated the majority of his career in the cryptocurrency and blockchain technology industry. He co-founded coins.co.th, Thailand’s largest bitcoin exchange. Before Blockchain emerged, Topp worked as an investment banker, financial consultant, and central banker. He is a speaker and one of Thailand’s leading bitcoin and open blockchain experts. He holds an MPhil in Economics from Oxford University, UK. Now he is the co-founder and group CEO at Bitkub Capital Group Holdings Co., Ltd. (BCGH), a company that holds the title as the startup with the largest seed investment in Thai history. He is also a board of Director at the Thai Fintech Association.
Alexandre Kech is Co-Founder and Chief Executive Officer at Onchain Custodian. Formerly the Head of Securities & FX Markets, Asia Pacific at SWIFT, he co-founded Singapore-based Onchain Custodian as a global, standardized, resilient, and compliant platform for the safekeeping of institutional digital asset investments with incomparable user experience. The solution is flexibly built to meet the possible futures of digital asset custody.
Anatoly Ressin is Chief Blockchain Architect at blockchain analytics firm PARSIQ. PARSIQ is a modular blockchain analytics and monitoring platform offering comprehensive tools for analyzing, detecting, and preventing cryptocurrency fraud and other illicit activities on the blockchain. The transparent nature of most blockchains allows PARSIQ to transform massive amounts of data into actionable information. Each of its modules can be used independently or as a full-suite to maximize omniscience on the blockchain.
Gregory Klumov is Co-Founder and Chief Executive Officer at STASIS. He is an innovative, research-driven investment management leader with a career built around leading teams and managing unique, multi-million-dollar portfolios on behalf of global funds and private investors. A non-linear thinker with authoritative knowledge of capital markets, Gregory is specifically skilled in building and introducing liquid / digital alternatives to complement more traditional portfolio investments (long / short equities, global macro).
Influential and solution-focused, he strives to simplify the complex and shift stakeholders’ mindsets to embrace cryptocurrency technologies. In recent years, he has developed and legalized the framework of a virtual financial asset in Malta and now building upon this infrastructure to build disruptive digital products, including the world’s first euro over PoW & DPoS blockchains.
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