Since the creation of Bitcoin in early 2009, cryptocurrencies have experienced a meteoric rise. And with that increase in cryptocurrency transactions and trading, a need for stricter regulation has arisen.
However, navigating the evolving regulatory landscape can be challenging for those new to crypto. And this can lead to the risk of non-compliance with crypto laws. Mastering crypto compliance will improve your reputation during these uncertain economic times fraught with financial fraud and crime.
These are the 7 essential steps for mastering compliance in the cryptocurrency world we live in.
1. Understand the Regulatory Environment
As cryptocurrency use becomes more commonplace, more regulations are being put in place worldwide. Understanding the regulatory environment and any changes or updates that occur is the best way to master compliance in cryptocurrency.
The International Organization of Securities Commissions (IOSCO) has also set out 18 recommendations for global rules on crypto and digital asset management.
Meanwhile, the Financial Action Task Force (FATF) issues guidelines to combat money laundering and terrorism. Markets in Crypto Assets (MiCA) play a major role in the European Union.
The World Economic Forum’s Pathways to the Regulation of Crypto-Assets details key regulatory developments you need to be aware of on the global stage. However, local regulatory bodies differ between the various countries.
In the US, for example, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC ) oversee various aspects of the cryptocurrency markets.
2. Implement Robust KYC (Know Your Customer) Procedures
Ensure your business adheres to AML and KYC compliance standards.
Anti-Money Laundering (AML) measures offer compliance with laws and regulations created to curb money laundering by organized crime networks and financing of terrorist networks. Know Your Customer (KYC) is an essential component of the AML program.
KYC focuses on verifying customer identities. This is important for transactions that would otherwise allow crime to run rampant under the cover of anonymity.
Create effective KYC processes using official identification documents to identify your customers. This is a crucial step towards preventing illicit activities such as fraud, money laundering, and the financing of criminal activities.
3. Establish Strong AML (Anti-Money Laundering) Policies
The emergence of cryptocurrencies presented a new headache in the fight against financial crime and money laundering. Because tracking and controlling transactions is more difficult with decentralized cryptocurrencies, illicit activities are a real concern.
This is why international bodies like the World Economic Forum (WEF) highlighted the need for anti-money laundering regulations for crypto. Fortunately, businesses have heeded the warning, with various AML processes designed to reduce the risk.
These processes include Customer Due Diligence (CDD) and Know Your Customer (KYC) Procedures, transaction monitoring, and Suspicious Activity Reporting (SAR). To ensure ongoing compliance, it is recommended that you conduct regular risk assessments to counter any new potential vulnerabilities.
4. Adopt Ideal Practices for Data Security and Privacy
Developers of the leading decentralized crypto apps know how crucial data security and privacy are. Indeed, robust security is one of their key features. These platforms leverage encryption and blockchain networks to protect users’ assets.
Data protection practices like access control restrict access to sensitive data (especially personal and financial) to authorized personnel only. Data encryption protects your customers’ data and ensures compliance with data privacy laws such as the General Data Protection Regulation (GDPR).
The GDPR was implemented in the European Union and sets strict guidelines for collecting, processing, and storing customer data within the EU. It also applies to organizations that, although outside the EU, handle the data of EU citizens and residents.
Adopt these best practices for data security and privacy practices to guarantee compliance with legal data privacy requirements and increase trust in your business.
5. Monitor and Report Suspicious Activities
There are various tools for monitoring crypto transactions. These include blockchain explorers, crypto wallet trackers, and other specialized crypto-tracking software that allow transaction pattern analysis.
Monitor transactions and report any suspicious activities to the relevant authorities, such as one of the regulatory bodies mentioned above, immediately upon detection. A suspicious crypto transaction deviates from the customer’s normal pattern of transacting, such as a sudden increase in large volumes.
6. Engage in Regular Compliance Audits
The main goal of a crypto audit is to verify the existence and ownership of crypto holdings. It also helps to ensure the accuracy of financial records. Assess your organization’s crypto usage, identify any risks, and set processes in place to mitigate these risks.
A third-party auditor will give a comprehensive review of your crypto portfolio, a risk assessment, a compliance check, and a detailed report on their findings. Although an internal audit will usually suffice, a third-party audit is the better option after a security breach or detection of a suspicious transaction.
Take note that digital currency transactions can also have tax implications. Therefore, understanding crypto tax compliance is also vital to being legally compliant, expediting audits, and avoiding penalties.
7. Educate and Train Your Team Continuously
Train your team in cryptocurrency management and compliance. Do a regular refresher course, especially when local or global regulations are updated or changed. Describe what type of suspicious activity to look for, and who to report it to.
Look online for programs that offer training in cryptocurrency compliance. They should cover topics such as KYC and AML procedures, data protection, data privacy laws, and the latest regulatory developments.
