Key Compliance Challenges in Crypto and How Our Youverify Solutions Address Them

Cryptocurrency is a digital or virtual form of currency that utilizes cryptography to secure financial transactions, control the creation of new units, and verify the transfer of assets.

Bitcoin and other cryptocurrencies run on decentralised networks powered by blockchain technology, in contrast to conventional currencies issued by governments (fiat currencies). This system guarantees the immutability, security, and transparency of transactions.

However, crypto and blockchain technology today have their downsides. Its technology is being used for criminal activities like money laundering and terrorism financing. Effective AML compliance is needed to address these challenges. Although being implemented today, there are several key compliance challenges still faced by the crypto industry. 

Youverify is a leading provider of automated AML solutions and offers products to address these challenges effectively. 

The growth of cryptocurrency in the world

Cryptocurrency is here to stay and with the prediction of experts,W it will become one of the leading trade and exchange items in the financial sector of world history in the next decade. 

The cryptocurrency industry has grown exponentially in recent years. The total market capitalisation of all cryptocurrencies surpassed $3 trillion in November 2021, up from just $10 billion in 2017. Even though it has seen a decline this year, experts are still confident that the market will bounce back to better form. This growth has been driven by a number of factors, including:

a. Increased Institutional Adoption

Increased institutional adoption by Major financial organisations like Morgan Stanley and Goldman Sachs, which has encouraged further investment and legitimacy of the Bitcoin sector. Many experts believe that in the next few decades more than half of the world’s countries will accept cryptocurrencies as a legal tender.

b. Decentralised Finance (DeFi) system

The Decentralised Finance (DeFi) system, a host of financial applications based on blockchain technology, which is becoming more and more popular. The applications provide a range of financial services, including lending, borrowing, and trading, that are unavailable in the conventional banking system; ultimately making, cryptocurrencies more useful and the ecosystem have more users.

The expansion of the blockchain ecosystem as a result of a network of businesses and institutions constructing applications on top of blockchain technology. This has made the ecosystem develop quickly in recent years making it more lively and competitive.

Even though challenges like regulation, privacy and security; and energy consumption in the mining of cryptocurrency may pose a threat, the threat is not potent enough to stop its growth as the industry matures.

Why Compliance Is Important For The Cryptocurrency Industry

As the cryptocurrency industry expands, it has to adhere to and align its operations, practices, and behaviours with relevant laws, regulations, standards, and ethical guidelines of the various countries or societal spheres they belong to and this is hinged on the following reasons:

i. Curbing Money Laundering

To stop the use of cryptocurrency for money laundering and other illegal activities. Businesses that deal in cryptocurrencies must establish AML controls to avoid unauthorised usage of their services.

ii. Anti-Fraud  

To safeguard consumers as dangers like fraud and other hazards come with developing technologies like Cryptocurrency. Businesses in the sector must take precautions to safeguard their clients against these hazards.

iii. Confidence Booster

To increase customer confidence in the Cryptocurrency business, which is still in its early phases of growth by adhering to industry rules and taking precautions to safeguard them against fraud.

iv. Anti-Sanction

To avoid sanctions by governments that are progressively regulating the cryptocurrency market, and looking out for companies who break the rules. Cryptocurrency-related businesses must be informed about the most recent rules and take action to comply with them.

What are the compliance challenges the cryptocurrency sector faces?

The following are some of the challenges the cryptocurrency sector faces in the area of compliance:

1. Smart Contract Auditing 

This involves ensuring the security, functionality, and compliance of self-executing code on blockchain networks. Given their role in decentralized finance (DeFi) and other applications, auditing smart contracts is challenging due to complex vulnerabilities, evolving regulations, and the need for ongoing assessment to prevent exploits.

2. Taxation and Reporting

The challenge of taxation and reporting in the cryptocurrency realm stems from the unique complexities of valuing, tracking, and reporting digital asset transactions. Accurately calculating gains, losses, and tax obligations can be confusing due to factors like fragmented data across platforms, volatile asset prices, and the intricate tax implications of cross-border transactions.

3. Licensing and Registration

Licensing and registration hurdles are encountered by cryptocurrency-related businesses seeking legitimacy in a regulatory framework. Negotiating the diverse and often rapidly changing regulatory environments across different jurisdictions presents challenges. This involves understanding specific licensing requirements, staying current with evolving regulations, and navigating potentially ambiguous guidelines.

4. Global Standards and Cooperation

The lack of standardized global regulations for cryptocurrencies creates obstacles for cross-border compliance efforts. Cryptocurrency operations often involve dealing with varying and sometimes conflicting regulatory requirements in different countries. The absence of harmonized standards makes it challenging for businesses to navigate international operations smoothly, leading to delays, compliance gaps, and a lack of cohesive global cooperation.

5, Market Manipulation and Fraud

Cryptocurrency markets are susceptible to manipulation and fraudulent activities; and many unsuspecting individuals and businesses have had their assets stolen either due to negligence, greed or ignorance. With this in mind, crypto businesses need partners that will help vet offers to determine their credibility, security and legitimacy.

6. Token Classification

Determining the regulatory classification of tokens representing assets, securities and utilities can be challenging and with a retinue of legal implications. Crypto businesses need compliance partners who will help them properly identify and classify these assets in tandem with regulatory standards.

7. Cross-Border Transactions

These days monitoring the flow of money across borders has become very important and the crypto business is also in the loop. Facilitating cross-border transactions while adhering to diverse international regulations can be cumbersome leaving the need for a compliance partner that will help keep the business on the side of the law while dealing with the business’ clients.

8. Privacy Concerns

As the world evolves, lots of individuals and businesses stress the need for privacy and security of their details and activities. 

Ensuring crypto businesses balance the privacy expectations of their clients with the need for transparency as required by regulators could become a problem; especially if the client is a person of interest.

9. AML and KYC Requirements

Ensuring compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations is challenging in the pseudonymous and decentralized nature of cryptocurrencies.

Criminal and terrorist groups are now finding smarter ways to move their assets and fund themselves through legitimate-looking businesses and one way to move their dirty money is through crypto currency. 

A crypto business may get into trouble with the law if it is found out that they are in business with these criminal elements.

10. Regulatory Uncertainty

The evolving and inconsistent regulatory landscape across different jurisdictions creates uncertainty for businesses and investors. Many countries have different views, regulations and levels of acceptance of the use of cryptocurrency within them. This affects the ability of the cryptocurrency businesses to perform their services within these jurisdictions.

How Youverify Solutions Simplify these Challenges for Businesses

a. Expert Industry guidance

We have compliance experts knowledgeable with the cryptocurrency world that can guide businesses, helping them to understand the regulations and implement compliance measures.

b. Optimal compliance software solutions 

We are well equipped with optimal software solutions like our workflow builder, that can help businesses automate compliance tasks and stay up-to-date on the latest regulations.

c. Tailored Services 

We also advocate for clear regulations tailored to the specific needs of the business as regards its foray into the cryptocurrency industry. Our end to end compliance product suite means crypto businesses have everything they need to stay compliant in one place.

d. Robust AML and KYC Implementations

We also implement robust AML and KYC procedures, including ID Document Verification and ID Data Matching to trace and identify suspicious activities for AML compliance before a crime is committed. 

We Also Make Sure that our Compliance Solutions…

• Satisfy regulatory requirements & avoid fines by verifying customer data according to laid down global and jurisdictional compliance guidelines.

• Provide real-time customer monitoring, making sure you have everything you need to verify customers and detect fraud on the go.

• Speed up onboarding with minimal compliance risk by satisfing global AML and CFT compliance laws without clogging your user onboarding process.

How Youverify Helps Crypto Businesses Achieve AML Compliance

Here are some of the ways we help crypto businesses achieve AML compliance: 

• AML Screening

Our AML Screening helps to prevent money laundering and other criminal activities. By identifying and verifying the identity of their customers, we help businesses prevent criminals from using cryptocurrency to launder money.

• Know Your Business (KYB) 

This helps us verify the legal existence and registry of a business for clients including the business’ address, incorporation documents, the identity of directors and ultimate beneficial owners.

• Know Your Customer (KYC) 

This solution can help protect consumers from fraud. By requiring businesses to verify the identity of their customers, KYC regulations can help prevent criminals from setting up fake accounts and defrauding consumers. This solution includes information on the customer’s ID, address, biometric, and phone number verification. AML screens and criminal/ fraud check customers for PEP and sanction listing.

The future of cryptocurrency compliance

Compliance with cryptocurrencies has a promising future. The demand for compliance solutions will increase as the bitcoin market expands. Businesses will need to adhere to rules in order to engage in the Bitcoin market, and there will be an increasing number of compliance solutions available to assist them.

The following developments are expected to have an impact on how bitcoin compliance develops in the future:

• Government regulation: 

Government regulation of the cryptocurrency market is expanding, and this trend is expected to continue. Businesses in the cryptocurrency sector will face new compliance issues as a result, but there will also be possibilities for providers of compliance solutions.

• Bitcoin Compliance Technology

New technologies are constantly being created that can be leveraged to boost compliance in the Bitcoin sector. Blockchain technology, for instance, may be used to monitor Bitcoin transactions and confirm users’ identities.

• Collaboration on solutions

Collaboration between businesses and regulators is growing as they work more closely together to create and execute compliance solutions. This collaboration will probably continue in the future, and it will contribute to the development of a more compliant Bitcoin market.

Overall, compliance with cryptocurrencies has a promising future. There are several developments that are expected to influence compliance in the future of the cryptocurrency sector, and these trends are probably going to open up new business prospects for companies that offer compliance solutions.

In conclusion,

The cryptocurrency industry is growing rapidly and has the potential to revolutionize the way we think about money. With the right compliance solutions in place, businesses can mitigate the risks associated with cryptocurrencies and seize the opportunity to grow their business in this emerging market.

Join the over 750 global companies that use Youverify to tailor their regulatory needs for compliance and real-time risk detection. Request a demo today!