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The discussion around crypto regulations and compliance, or the lack thereof, often fails to grasp the larger picture. Financial regulation, in general, aims to safeguard consumers, prevent fraudulent activities, and promote orderly markets. This mission holds true across jurisdictions and for any financial regulator.

The crypto discussion has been excessively focused on the industry itself, often at the expense of the crypto user. By fixating on whether particular exchanges should comply with current or new regulations, we miss out on exploring ways to optimize the benefits for consumers.

Timothy Cradle serves as the Director of Regulatory Affairs at Blockchain Intelligence Group and also works as a compliance advisor for Biokript.

As a director of regulatory affairs and compliance consultant, my approach towards crypto regulation and compliance is objective. When advising clients on implementing a compliance framework, I set aside any personal ideology and focus on the practical question of "what needs to be done to ensure compliance." Striking the right balance is crucial: overly strict regulations can harm their business model, while being too permissive may result in long-term failure, often in the form of an enforcement action.

I am not the only one who takes compliance in the crypto industry seriously. Having previously served as a chief compliance officer for a crypto startup, I am aware that other professionals in the field also bear personal liability for the compliance programs they recommend. A mistake can be career-ending. When considering the two contrasting operating models in crypto, namely decentralized and centralized services, it becomes apparent that each has its potential drawbacks that must be addressed. To mitigate these risks, it is necessary for each extreme to adopt elements from the other.

The overarching objective of crypto is to offer individuals a superior financial system.

Last week, the U.S. Department of Treasury underscored the significant financial crime risks associated with decentralized finance (DeFi), which include money laundering, theft, scams, and sanctions evasion. The agency noted “DeFi services often have a controlling organization that provides a measure of centralized administration and governance.”

As a compliance professional, I believe that imposing the same regulatory controls on decentralized institutions as those expected of centralized ones is both feasible and reasonable. The Digital Assets Anti-Money Laundering bill, introduced to the U.S. Senate in December 2022, appears to share this perspective, as it seeks to subject any service that "facilitates digital asset transactions" to the Bank Secrecy Act, the U.S. anti-money laundering law. DeFi is widely recognized as presenting unique risks, as evidenced by the litany of thefts, rug pulls, hacks, and scams that have plagued the industry. There is no need for the government to inform us of these risks.

Centralized players in the crypto industry are not immune to compliance failures either. In the past month alone, Binance has come under scrutiny for its disregard of basic compliance measures, such as know-your-customer (KYC) and regulatory registration requirements. Binance is currently facing a lawsuit in the United States and is expected to exit the Canadian and UK markets. Moreover, there is a possibility that it may lose its license in Australia, with the regulator outlining a comprehensive list of Binance's regulatory shortcomings in the license revocation announcement.

Several crypto players in the United States have been fined for failing to register their securities products with the Securities and Exchange Commission, leaving their users with little to no protection. This comes in the wake of a year of significant losses due to fraud, market manipulation, embezzlement, and bankruptcy in 2022, which could have been prevented had these players not had direct control over their users' assets. These incidents have highlighted the urgent need for robust consumer protection measures in the crypto industry.

What are the key factors that enable both sides to work effectively in the crypto industry?

Centralized entities in the crypto industry must prioritize transparency and accountability. This means being regulated and required to act in the best interests of their users, disclosing risks honestly, and being held responsible for providing necessary disclosures. Anonymous transactions on a blockchain are not sufficient for transparency. Additionally, these entities must implement robust cybersecurity, fraud prevention, and anti-money laundering controls, as simply conducting a smart-contract audit is insufficient.

Decentralized entities should ensure that transaction settlement is handled by the service, while asset custody always remains with the user.

We should not forget that the main purpose of cryptocurrency is to offer individuals a more advanced financial system than what they have experienced in traditional systems. On the other hand, the primary objective of regulation is to safeguard consumers. The most desirable outcome is achieved by blending these two concepts, just as we need to combine the concepts of centralized finance and decentralized finance to establish a system that is equitable and beneficial for all stakeholders.

Adequate rules are already in place to regulate crypto and protect consumers, but what the industry requires now is to adopt the appropriate features of centralization while preserving the principles of decentralization.

Source Coindesk