Oct 27, 2020 | Compliance, Cryptocurrency, Financial Services, Regulation
Elevate your DeFi profile, and put compliance and regulatory risks to rest.
US regulators are looking for cryptocurrency sacrificial lambs. Digital assets business owners who ignore anti-money laundering (AML) laws are wearing a regulatory bullseye.
A case in point is the Seychelles-based cryptocurrency exchange BitMEX.
In July, Coindesk announced that BitMEX was under investigation by the U.S. Commodity Futures Trading Commission (CFTC).
The CFTC took the view that BitMEX was selling commodities to Americans without registration.
Then it’s COO, Angelina Kwan, the former MD and Head of Regulatory Compliance at HKEX, left, BitMEX.
On October 1, 2020, the CFTC charged the owners of BitMEX, Arthur Hayes, Ben Delo, and Samuel Reed.
The complaint alleged that BitMEX is an unregistered trading platform and violated multiple CFTC regulations, including failing to implement required anti-money laundering procedures.
If you operate a DeFi platform, I have good news for you.
You could elevate the reputation of your DeFi platform and put compliance and regulatory risks to rest.
With the appropriate DeFi Compliance program, you can avoid the allegation that the decentralized financial services you offer provide a money-laundering safe haven.
With the appropriate DeFi Compliance program, you can implement protocols to:
- Report malicious cryptocurrency addresses;
- Identify ransomware hacks and other types of fraud; and
- Block suspicious users and questionable funds from transacting on your DeFi platform;
Most importantly, you will have a solution for AML and Bank Secrecy Act (BSA) compliance, where necessary.
Remember, the Financial Action Task Force (FATF) regulations including the “Travel Rule” which requires Virtual Asset Service Providers (VASPs) to collect and transfer customer information during transactions.
Are you ready for positive press reports on your DeFi compliance protocols?
Oct 18, 2020 | Compliance, Cryptocurrency, Financial Services, Regulation
The hottest trend in blockchain is Decentralized Finance, also known as DeFi.
What is DeFi?
DeFi Pulse states that DeFI is “digital assets and financial smart contracts, protocols, and decentralized applications (DApps) built on Ethereum. In simpler terms, it’s financial software built on the blockchain that can be pieced together like Money Legos.”
Aha, money legos! That’s a concept even a child can understand. Borrowing, lending, hedging, exchanging, and trading of different crypto assets, are all activities in the money legos.
The Department of the Treasury is one United States agency responsible for regulating money. The Financial Crimes Enforcement Network (FinCEN) is one of the most well know divisions of Treasury. FinCen has a lot to say about cryptocurrency.
US Regulations impacting DeFi
FinCen first took a shot at blockchain-enabled digital assets in 2013. The initial guidance indicated that an administrator or exchange of cryptocurrency is a Money Service Business (MSB). This is significant because, MSBs must register with FinCen, and comply with the Bank Secrecy Act and the USA PATRIOT Act.
A MSB compliance program requires the implementation of processes to Know Your Customer (KYC). KYC is a system of documenting the personal and economic biography of a customer. Additionally, the MSB must ensure that the customer is not on a government-prohibited list for drug traffickers or terrorists.
European Regulations affecting DeFi
The European Union Directive (EU) 2018/843, also known as (“AML 5”), is now effective. This legislation is intended to bolster the methods and activities related to anti-money laundering and combatting the financing of terrorism (“AML-CFT”).
Some elements of the legislation include:
- restricting the anonymous use of cryptocurrencies;
- increasing the types of business subject to AML-CFT obligations; and
- and identifying the beneficial ownership of businesses.
In 2019, FinCen made it clear that you are engaged in the money transmitter business if you are involved in
“The acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.”
So what are DeFi promoters are really after? Global adoption of digital assets by people and businesses to new types of financial institutions using distributed ledger systems. Some of these financial titans tout the lower transaction fees, efficiency, fungibility between different ethereum products. Others promote faster confirmations and global reach of digital assets. In order words, a massive money transmitter business.
Some argue that pushing KYC and AML rules on DeFi platforms will negatively impact those who need Defi the most, the unbanked. While that may be true, the reality is that DApps are generally engaged in MSB activity, and must comply with the relevant laws.
DeFi and DApps Compliance
Innovators and creators DApps who seek to be successful in the long term must consider finding a compliance partner to provide advice, create and maintain the compliance function for the business. The right professional should be knowledgeable about corporate governance, compliance program management, financial crime compliance, and have a regulatory background.
Licenses are required to conduct the DeFi business in many countries and regions. A compliance professional skilled at managing regulatory applications helps reduce the legal costs of startups. The Financial services sector requires a steady hand.
The DApps compliance partner provides sound, consistent, and coherent compliance advice, interpretation, and recommendations on business initiatives, products, and policies. Most importantly, the professional takes a consultative approach to support the business. The incumbent also stays informed on the latest industry trends, news, and events that may impact the business.
Regulatory rain is coming to digital assets, the question is how long will it take for the industry to buy an umbrella?
Theon Alleyne is a former securities regulator, and SME on Broker-Dealer Regulation. He specializes in helping financial institutions to transform their risk and compliance program, including Financial Crimes Compliance (Fraud, AML, KYC, and Sanctions), and sales practice conduct risk.
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