The growth in the cryptocurrency sector has always gone hand in hand with increased interest and scrutiny of governments worldwide as crypto has been able to hit the 3 trillion dollar market capitalization mark. The unprecedented rapid growth of cryptomarkets has forced governments and central banks to start addressing concerns and take some initial stances on digital assets. Increased regulation is inevitable as crypto seems to no longer be a fad and likely to stick around for a while despite its volatility and in general, somewhat immature markets.
Even though amongst most retail traders, the word “regulation” brings a cold shiver down their spine, the truth is that it also has the potential to have a positive impact as a whole. One thing that is certain is that it’s inevitable. After witnessing new and more frequent statements by central banks and discussions in congress, it is highly likely that global central banks and governments will slowly put a damper on the wild wild west we have experienced in the cryptocurrency markets.
To look at the bright side, what positive impacts could further regulation possibly have on the markets?
The problem with a lack of regulations is not the lack of regulations in itself but rather the lack of clarity and uncertainty presented alongside it. This hinders anyone attempting to conduct any form of entrepreneurial activities, such as starting new crypto-related businesses. The problem with offering new products or services in the cryptocurrency space in countries with an unclear regulatory framework, such as the United States, you can’t be sure you won’t get hit an enforcement action from the authorities at some point in the future. Overall, this will contribute to slow down growth and development significantly.
To combat the current uncertainty and archaic U.S. regulations, we have seen exchanges attempt to create separate exchanges for the U.S. market and the rest of the global market. Considering that traditionally you will find the most liquid markets (traditional markets) in the United States, this, in turn, creates lower liquidity for U.S. traders and international traders. Seeing as U.S. authorities are always seeking to “protect” U.S. investors, even when it does more damage than good, I doubt we will have an international and U.S. licensed exchange as one any time soon. This is one of many inconvenient solutions that have been made to keep operating in the cryptocurrency space.
So, what do you have to look forward to?
Newer entrants in the cryptocurrency space are all likely very accustomed to KYC. However, not too long ago, this was considered a deal-breaker for most traders, and today you will not be able to trade any worthwhile amount of USD on any of the most liquid exchanges without going through a KYC process.
We expect future regulations to focus on know-your-customer and anti-money laundering programs and stricter expectations of compliance programs to a much larger extent than today. We are already seeing that most exchanges have shifted tone regarding the importance of KYC and are forcing users to comply and verify themselves.
The expectation of regulators in terms of to what degree the exchanges have control on the outflow and inflow of capital, where it comes from, and the risk assessment for all transactions have also steadily increased. It is no longer enough to only conduct KYC processes, but it is also expected that exchanges and crypto-ecosystems supplement their current programs with on-chain analytics tools and machine learning. This includes other innovative techniques to expand their efforts to be able to observe financial crimes on the blockchain.
Banks have this implemented already, however, the nature of cryptocurrencies provides quite different challenges, which makes it necessary to rely on sophisticated analytical software to a much greater extent than in traditional finance.
Besides KYC becoming a standard solution, some might ask themselves, well, what’s going to happen with decentralized exchanges and self-hosted wallets such as Meta Mask?
The solution is quite simple, we’ve already seen some signs of it for accredited investors and others interacting with institutional projects and services. While retail has been left alone, I suspect this will change going forward. The solution is to whitelist your specific address through a KYC process, documenting that you are who you say you are and confirming that the wallet address specified belongs to you. Some will permit the usage of a legal document you sign to confirm the address, while others will need you to sign a transaction.
We have already witnessed how sensitive exchanges are to transactions that have gone through mixers or and tumblrs in an attempt to anonymize it, they tend to become flagged automatically and the chances are high the anonymized crypto will be flagged and frozen. Crypto exchanges are deathly afraid of having anything to do with capital stemming from illegal activities. This could potentially cause great issues with regulators and governments, which are already somewhat skeptical of the current practices.
Note: Please avoid using mixers or tumblers in a bid to find privacy. Any linking of mixers and tumblers your personal wallets can cause a real head-ache, if not now, then in the future. I would also be concerned if some of these sites are honey-pots.
There will always be decentralized spaces where there will be zero KYC procedures and no regard to regulators, the issue is, most of us at some point in time would like to turn the cryptocurrency into cash for the purchase of tangible assets, and if that is the case, it is really strenuous to do without having a KYC approved off/on ramp.
The days of the wild west are coming to an end, perhaps to the pain of those valuing privacy over all else, but likely to the joy of entrepreneurs that will hopefully have a clear-cut framework to work within the coming years.