Wild West No More: Regulation comes to the crypto corral
Mentioning regulation and digital assets, particularly cryptocurrency, in the same sentence was once unthinkable — and still seems ominous to a lot of the pioneers of the digital currency space. Why did they pursue this unregulated, decentralised form of currency so ardently if it was just going to fall under the same regulatory frameworks that traditional fiat currencies, payment methods and banking do?
“It’s part of crypto’s DNA to be unregulated, some might say. It falls outside the scope of government and should remain so for all the reasons it was created in the first place. But if crypto is the future and there are valid concerns, then surely these should be addressed. If we want crypto to be accepted and become part of our everyday lives, then we need to engage in the debate and embrace reasonable and responsible regulation. Even the most devout supporters, who wish nothing more than to see crypto succeed on a mass scale, could agree that the growth of this industry depends, in part, on the establishment of safe, fair and reliable market conditions.” —Peter Lin @ Cointelegraph
As the crypto/digital asset space matures, though, more and more voices are being heard that echo the idea that part of maturing and being transparent requires enabling trust and looking for safe, well-understood ways to make digital assets, and their use, a real part of everyday life. We are, after all, still establishing the frontier, but we’re beyond the point where cowboys and lawlessness dominate.
Where is the balance then, when we want to create a platform and marketplace that both complies with the law but does not stomp on users and privacy, that does not seek to replicate banks and credit card companies with their fees and accessibility problems, but seeks to be inclusive instead? Believe it or not, regulation can help, particularly in safeguarding what we are enabling today and in looking toward the technologies and applications of the future.
Think of regulation as a layer of trust
To be able to innovate and build an ecosystem that is used by and benefits global businesses and institutions, as well as by the average individual, the common denominator we must establish is trust.
For example, when NBX started off, Norwegian Air Shuttle was looking for a way to diversify, and recognised digital assets and blockchain as the wave of the future. Norwegian started to dive in and explore the possibilities offered by accepting cryptocurrency as payment for airline tickets. They soon realised that they would not be comfortable trading in existing marketplaces or in using off-the-shelf trading platform products once they decided to support their own spin-off exchange. There was no exit to fiat currency, which was one key factor for them, but more than that, they didn’t see the kind of integrity that would give them the ability to trade and act with confidence. If you want something done right — or at least to your specifications — do it yourself, right? And thus was born NBX.
Once NBX came into being, and we started building our own exchange, we could see why Norwegian was so cautious. And this is part of why we have demanded of ourselves a living mission of achieving transparency, leading the way with compliance and security, and earning trust for our exchange and payment solution. We examined existing exchanges; we performed code review. We didn’t trust them either. We had to go our own way while also ensuring that we would be different. And how?
By establishing trust.
It seems simple, right? Just get the best developers you can find and take off. This overly simplified approach, though, does acknowledge an important distinction: cryptocurrency itself is not the thing that needs regulation. It’s the company and the people involved who do. Building the best, most secure platform in the world is irrelevant if trust does not follow — at least this is the case with mass adoption and use. A blockchain/protocol-based trading system is one thing; a company offering custodial services is another. When people are involved, an additional layer of protection — and trust — is required.
Regulation can equal transparency
The dual challenges of security and regulatory compliance — on top of our own commitment to weaving transparency into everything we do — means that we need the equivalent of constant airworthiness checks and need to act a bit like our own version of air traffic control. While there really isn’t such a thing — or shouldn’t be — as “self-regulation”, we do take the mandate to foster trust seriously, meaning that we are mindful of, for example, such possibilities as:
- Security: Breaches, exploits, hacks, etc.
- Regulation and compliance: Ensuring we don’t run afoul of constantly developing regulatory frameworks
- Internal controls: Are we vigilant enough? Are we secure enough? Are we transparent enough? Are we testing enough, doing enough QA?
These should be guiding questions for everyone working in this sector. To be good enough by our standards, and by Norwegian’s standards, to facilitate the agility and security needed, we had to build from the ground up because we needed to be able to answer these questions about quality, security and transparency without hesitation.
Many cryptocurrency platforms have struggled and suffered the consequences of not being quite secure enough. Year-on-year, quite understandably, the number of crypto-based crimes, and the amount of money stolen, increases. So far in 2019, hackers have stolen more than four billion USD, which already dwarfs what was stolen in the entirety of 2018. We would rather not join them.
Current state of regulation and compliance
Coinfirm, a regtech compliance company, published a cryptocurrency exchange risk report in March 2019, in which they highlight that more cryptocurrency exchanges are moving toward regulatory compliance, and they estimate that in the near future, companies will be categorised as engaging in “regulated activity” and “unregulated activity”. Nevertheless, even with movement toward compliance, the report examined 216 global crypto exchanges and found that only 14 percent of them were licensed by regulators. Only about a quarter of the exchanges had clear know-your-customer and anti-money laundering regulations in place.
There is clearly a long way to go here, and the importance of doing so has multiple rationales, although some of the most obvious include:
- Easier mainstream adoption
- Consumer protections
- Streamlining payments/cutting out middlemen
- Attracting legitimacy
- Attracting investment in the sector
- Partnerships with financial institutions
- Partnerships with other ecosystem players, leading to greater cooperation, innovation, invention
Regulatory compliance is something NBX has worked toward — and achieved — since incorporation. NBX is a fully regulated exchange and custodian for virtual assets in Norway. It is governed by Norwegian regulations, and is an officially registered company within the purview of the regulating body, Finanstilsynet (the Financial Services Authority of Norway). As we make moves to go global, and as regulatory bodies also begin to make moves, this pursuit of legal, regulatory and compliance approval will only become more important and a differentiator. That is, we will be classified as “regulated activity” or “compliant” as described earlier, and this may be the ultimate line in the sand in terms of how, whether and with which trading platforms and payment systems cryptocurrency becomes a mainstream way of transacting.
The next regulatory wave
Oversight is increasing all the time. In June, the Financial Action Task Force (FATF) introduced its “travel rule”, which requires transactions between exchanges to include personal information about the sender and receiver (not unlike the existing SWIFT transfer system for fiat currencies). These kinds of moves will likely drive away some of the crypto pioneers and cowboys, but will hopefully create an environment that is both consumer-friendly and business-friendly, attracting investment, particularly from the traditional financial sector. For our part, we recently announced our partnership with Norway’s Sparebanken Øst, which signals a growing openness within mainstream institutions for doing business with and innovating around digital assets and blockchain technology.
Even as the global regulatory environment shifts, we are confident that regulation will help build the credibility and trust that are needed to forge growth, innovation and fair, safe market conditions for all participants:
“Regulation is not the process by which users are deprived of the liberties and benefits essential to cryptocurrency. Rather, it is a necessary condition by which they can be made available to everyone.” — Peter Lin @ Cointelegraph