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3 Common regulatory and compliance difficulties that can be seen in 2020

June 2, 2020

The regulations don’t go anywhere. In contrast, financial service providers face more regulatory challenges and higher costs than ever before. A “wild west” culture emerged in the early days of cryptocurrencies when regulators, unsure of how to tackle this problem called blockchain, did little to prevent the theft, fraud and hacks that plagued the virtual asset market Paid attention.

This is no longer the case today. Regardless of their roots, all virtual asset projects, from telegrams to shapeshifts to scales, increase compliance while the regulatory authorities continue to issue guidelines. by enforcing regulations and taking greater account of digital securities platforms, cryptocurrency exchanges and other VASPs (Virtual Asset Service Providers) that serve residents in their respective jurisdictions. Even so, many blockchain organizations continue to face a painful combination of disinformation, obscure legislation, and deliberate ignorance in fulfilling their commitments in each of the markets they serve.

As demand for digital technology continues to grow, regulatory compliance has become a competitive advantage and a key differentiator for the success of fintech and digital asset platforms. In contrast to the days of the Wild West in the industry, “compliance” is the new buzzword when it comes to promoting fintech services. Headlines like “Compliance Platform _______” appear on digital stock websites. Security tokens, ICO, FX, OTC, brokers and exchanges.

3 Common regulatory and compliance difficulties that can be seen in 20203 Common regulatory and compliance difficulties that can be seen in 2020

To call something “compliant” is unfortunately not. The definition of compliance is not only a moving goal, but also includes gray areas as a “risk-based approach”, which can change enormously depending on the type of business activities and customer base. Without defined industry standards for guidelines such as Know Your Client or anti-money laundering, it is easy to see why Virtual Asset Service Providers (VASP) – even those with the size and budget of Coinbase, Binance or Libra – are struggling for a business that can Standards.

To stay ahead, VASPs need to have a clear understanding of their regulatory obligations and how this affects the profitability of their business in a given market. Avoiding the three most common compliance issues can shorten a company’s time to market, create barriers to entry, and protect its reputation.

Error 1: KYC means to verify the identity of the users while they are users of the platform

This is the biggest misunderstanding that plagues most digital securities platforms, exchanges, and other providers of virtual asset services in the market today. Know that your customer is not a one-off – you need to keep verifiable and up-to-date records of each customer as long as you serve them.

In many countries, your recordkeeping obligations may extend years after the customer stops doing business with you. To build a robust and scalable business, it is important to consider and design KYC updates, ongoing AML research, transaction monitoring, and user authentication for the entire customer lifecycle.

Error 2: Changes in compliance requirements depend on where you are.

Most virtual asset companies are subject to a variety of regulations: data protection, personal data protection, KYC, money laundering, securities and derivatives, payments and digital identity. Some regulations such as the GDPR apply to all members of the European Union and in harmonized jurisdictions. Others, such as payment services, are very differentiated with complicated government regulations for money services and senders, as well as information requirements. In Singapore, payment brand companies had to close or leave the country while waiting to do business legally.

It is important to understand the regulatory obligations of all markets that serve even a single user. For example, if you have a license in Estonia or Lithuania, you may not be able to offer the same service in Germany, the UK, or Canada. While a company can use the “passport” in multiple jurisdictions with a single financial services license, it is important to understand where and whether there are other regulatory variations, including how data is collected, processed, maintained and communicated.

Mistake 3: Build it once and you’re done

While this is theoretically possible in very small markets, a company’s activities in practice are most likely subject to multiple regulators in each market it serves. New regulations are introduced every week, which can affect how users’ personal data are processed or maintained, their legal identity checked, risk checked, customer due diligence carried out, or documenting successful compliance processes.

To stay one step ahead of these challenges, management teams need to view their business through multiple lenses such as AML regulation, VASP, or securities. This is only in the area of ​​financial regulation. New trends in one market can quickly become the norm in others. Using one method in one market can become illegal in another. Innovative companies often find new ways to use regulation to their advantage and to keep an eye on the changing landscape.

Important regulatory changes in 2020

While this is not a definitive list, here are some of the key regulatory changes that need to be carefully considered in 2020:

Virtual asset service provider

  • Last year, the FATF published new guidelines that included definitions for both virtual assets and virtual asset service providers. Around the world, financial intelligence units such as FinCEN in the United States publish local updates to their interpretation of the FATF definitions.
    Businesses need to implement and maintain an AML program, even if they are “crypto-only” service providers that avoid “fiat” transactions. These changes will take effect in most FATF member countries over the next twelve months. In particular, the June 2020 deadline is met in the United States today.
  • The so-called travel rule, also from the FATF, has generated great expectations and misinformation across the industry. Most importantly, it does not include peer-to-peer or wallet-to-wallet transactions, but rather transactions where funds are transferred on behalf of the end user by a VASP, with different interpretations setting local thresholds such as $ 1,000.
    Similar to the development of SWIFT for bank-to-bank transactions or the FIX protocol for transactions between exchanges, Compliance with the travel rule requires that the industry work together on technology, standards and interoperability. A global standard for VASPs will enable new decentralized open source financial models that match the design.

Digital values

  • Communication: How a VASP markets its products and services or how an issuer markets its token is subject to numerous regulatory requirements. Promising financial returns, spam to potential users or investors, and the way and where KYC data is stored and processed are subject to data protection regulations, consent and disclosures.
  • The United States: The example of Telegram’s recent TON closure clearly shows that digital stocks Compliance by design not only saves a lot of time and money and prevents fines or adding to watch lists, but can also be the main factor that keeps a project alive.

Secondary markets

  • In the United States, the Open Finance Network closes primarily due to the lack of a market. Meanwhile, Nasdaq and Carta are trying to use their massive user bases and established brands to create their own private markets. These trends are reflected in Canada, Europe and Asia, a global race to decipher the holy grail of finance: compatible and automated with liquidity in multiple jurisdictions.
  • Worldwide, new regulations for customer authentication and transaction monitoring require financial service providers to manage a network of complex instruments. The integration of digital technologies is not a KYC. The most common reason financial technology companies fail to check compliance at an early stage is because they don’t understand the full scope of what it means to know their customers consistently. By integrating or consolidating cybersecurity, anti-fraud, integration, KYC, AML, etc., these companies not only make it easier to comply with regulations, but also create a scalability architecture for their company. In the case of private capital markets, platforms will have the market that overcome the false dichotomy between data protection and security and strike a balance between risk management and respect for data protection, data and assets of their users. .

The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.