Cryptocurrencies have entered the business landscape with a bang and have brought with them calls for increased regulation. While regulation of the industry seems inevitable, strong regulation could cause big problems for cryptocurrencies.
But why? Jimmy Huang, strategy and solutions engineer, Duco, a fintech enabling financial services firms to control complex data using light-touch, self-service technology, sat down with The Fintech Times discussing how crypto organisations will be impacted by regulations, while also highlighting the importance of handling financial data carefully and responsibly to avoid stricter regulations.
With seven years of experience in the financial industry, Huang explained why data management was such a hot topic in the crypto sphere:
In 2021, the crypto-asset market capitalisation had grown 3.5 times to $2.6trillion, demonstrating the incredible rate at which the world of digital assets is scaling. However, as a result of this skyrocketing interest, calls for increased regulation are becoming louder. Crypto asset-markets are being perceived as a future potential threat due to their scales, structural vulnerabilities and increasing interconnectedness with the traditional financial system.
Regulation has sparked real debate between players in the crypto landscape. Those who view it as necessary believe that without a clear set of guidelines to legitimise digital assets in the world, crypto firms will lack the certainty they require over whether they will be allowed to continue operating or not – a huge potential impediment to the future growth of this industry. Others, however, believe that a key role of cryptocurrency is to challenge established frameworks.
The drastic variation of attitudes towards regulation in this space has been reflected by countries all over the world. China has banned all crypto trading and mining, the UK only has one regulation involving platforms needing to register with the FCA, and India has gone back and forth between wanting to ban and not ban cryptocurrencies.
Nevertheless, whether you are pro or anti-regulation, the inevitable fact remains that stricter regulations are on the horizon, which begs the question — what could the impact be?
The difficult nature of crypto compliance
Global regulators are paying closer attention to cryptocurrency transactions than ever before in a combined effort to prevent any severe implications for global financial stability. Therefore, the need for crypto companies to adhere to compliance responsibilities is growing in urgency. Yet, due to blurred boundaries laying out how crypto assets are sold and marketed, and ill-defined regulations, cryptocurrency companies are set up for a difficult time from the outset.
Firstly, determining what a crypto asset actually is can prove to be immensely problematic; with different regulators governing different types of assets, the nature of the cryptocurrency comes into question. An example of this is the ongoing SEC v Ripple lawsuit which showcases how the dynamic nature of regulatory decision-making in the space can make compliance a very difficult task for crypto companies. It also demonstrates how financially taxing the penalties of non-compliance can be.
Secondly, once you’ve determined what a crypto asset is, you then need to deal with the extreme amount of data that asset creates. Take Bitcoin for example: data relating to trades, purchases and conversion rates all flow into systems in long text streams with huge decimal points beyond that of traditional monetary trades. Most reconciliation platforms are not data agnostic and therefore can’t manage data of this complexity and scale. This makes managing crypto data a challenge that opens companies up to fall short of compliance.
Thirdly, the regulatory landscape is ever-evolving with the complexity, versatility and volume of new regulations all contributing to the difficulty of compliance experienced by cryptocurrency companies. Just ask the traditional banks, who now spend a huge percentage of their costs on compliance alone. The diversity of regulation can be difficult for any one organisation to handle, especially without the right technology to do so.
And finally, policies such as AML and KYC are getting stricter to combat money laundering and the processes needed to carry out compliance have a significant data component. Without easy access to accurate, enriched data on customers and their counterparties, organisations are bound to be dramatically slowed down in their ability to stay compliant.
Overall, it is becoming a necessity for crypto companies to implement extremely flexible and adaptable architectures to deal with anti-money laundering, identity verification, data collection, accounting, and reconciliation.
Why automated data processes are important for compliance
As alluded to, data management deserves some particular attention here. All parties involved in crypto are well versed in the importance of data and processing integrity, due to the sheer volume of data that flows through these architectures and the nature of crypto. Nevertheless, the influence of stricter regulations has reinforced the vital need for cryptocurrency companies to have good data management systems in place to handle financial data with the utmost care.
As firms scale and cover consumers as well as institutional processes, they have to buy or build more and more front and back-end systems to cover their growing requirements and allow them to adapt to potential unforeseen challenges. These systems will all rapidly evolve over the next few years and process a large volume of data at peak times.
This data must flow between these systems seamlessly and safely. As crypto scales –supplementing slick front-end solutions with user management– reconciliations and data checks on Excel spreadsheets are no longer going to be acceptable and are unlikely to be viewed with kindness by auditors in future.
In response to increasing regulation, many crypto companies have already begun assembling a governance layer from SaaS solutions notably in the AML and KYC space, which allows them to identify, control, manage, and mitigate their data through use of a subscription-based software. By improving data governance via automated data processes that can handle scale and volume of data, crypto companies can effectively mitigate the risk of being found non-compliant and can ensure the data is consistent and trustworthy.
When crypto companies automate end-to-end processes, the risk of security threats and data breaches is significantly reduced, as is the risk of errors caused by data entry mistakes – ultimately, the data integrity becomes more secure.
Overall, due to the volatility of the regulatory environment, the scale of volumes encountered, and the rate of innovation, it is essential for crypto companies to invest in solutions that are adaptable, highly scalable, and can be deployed quickly. In return, the companies will run significantly leaner operations, be more compliant, and receive the additional bonus of transparent visibility over their operations.