The cryptocurrency space is moving fast, so much so that every year there is a new trend: from initial coin offerings (ICOs) to non-fungible tokens (NFTs) it has only been a few years. Faced with such amazing innovation, cryptocurrency companies and regulators are faced with an increasing challenge: balancing security practices with new products and features.

The focus of some companies is to move quickly and adopt new innovations as they come out, leaving behind security processes such as security controls. Know Your Customer (KYC) and Anti-Money Laundering (AML), as secondary. Popular crypto exchange Binance appeared to use this strategy until this year, when regulators began to take action.

Binance’s KYC policies initially allowed users who did not fully verify their identity to withdraw up to 2 BTC per day. The exchange included margin trading pairs with major fiat currencies and allowed up to 125x leverage from its futures trading platform, but had to reduce available leverage and delist margin trading pairs when, apparently, began to be investigated for him US Internal Revenue Service and the Department of Justice.

Since then, the exchange has taken a friendly approach to regulatory compliance and has implemented mandatory KYC processes for “users around the world, for every role.” Measure supposed the loss of about 3% of its total number of users.

Although Binance was forced to remove some of its offerings and reduce leverage on its platform, other exchanges continue to offer users these same products. Speaking to Cointelegraph, Yuriy Kovalev, CEO of cryptocurrency trading platform Zenfuse, noted that Finding regulations that allow compliant companies to compete is a challenge that must be addressed:

“Finding a way to balance a regulation that protects investors and innovation is difficult, especially in a space where new financial offers appear every few months.”

Speaking to Cointelegraph, the CEO of crypto exchange Bittrex, Stephen Stonberg, noted that Crypto regulations are now “quite complex” and handled differently in different jurisdictions.

Stonberg hinted that customer safety should remain a priority, as “Stronger and clearer regulation (as in the traditional financial sector) is needed to really ensure the security of assets and customer data.” As an example, Stonberg pointed to the Liechtenstein Blockchain Law, that “It provides much more certainty and clarity around how an exchange should onboard new clients and protect client assets.”

Some actors in the sector consider that regulatory clarity is a necessity, given that without it innovation may lag behind. In a recent blog post, the cryptocurrency exchange Coinbase, that is listed on the Nasdaq, He noted that his plans to launch a loan program were stopped by the US Securities and Exchange Commission (SEC), which threatened to sue him “without ever telling them why.”

Coinbase said it tried “enter into a productive relationship” with the SEC, but never received clarification on the SEC’s reasoning or how it could modify the product to be compliant. One proposed alternative has been to leave regulators on the sidelines. The officer of the Commodity Futures Trading Commission (CFTC), Brian Quintenz, has defended this alternative, calling at one point for crypto exchanges to regulate themselves, echoing the sentiment of many in the industry.

Is self-regulation a viable alternative?

The concept is nothing new: Organizations like the Financial Industry Regulatory Authority (FINRA) have helped implement initiatives aimed at protecting securities investors with brokers and brokerage firms. In Japan, a self-regulatory body has been created for the cryptocurrency sector, the Japanese Cryptocurrency Exchange Association (lit, Japan Cryptocurrency Association).

Stonberg doesn’t think the answer is the path of self-regulation, as the “complex nature of this digital ecosystem makes regulation complicated.” For him, self-regulation would mean “undoing” all the hard work done on the regulatory front for cryptocurrencies and “re-complicating the whole environment, putting a handicap on progress.”

The pseudonym of the founder of the Flare Network-based decentralized finance (DeFi) platform, CryptoFrenchie, told Cointelegraph that he believes in the “capabilities of decentralized platforms and centralized platforms alike to provide a self-regulating environment that reacts effectively to meet (or exceed) the needs of today’s regulatory requirements.”

The founder of the DeFi project added that current systems “They have proven incapable of meeting the needs of the current financial system”, and added:

“Applying these same systems to an even faster environment like cryptocurrencies could prove more stifling for their potential than support.”

The founder and CEO of the cryptocurrency exchange CEX.IO, Oleksandr Lutskevych, suggested that self-regulation may be an option, saying that based on the firm’s experience, self-regulation is the answer “when there is an absence of an applicable regulatory framework.” Speaking to Cointelegraph about his company’s track record, Lutskevych said:

“Until a framework for cryptocurrencies was formalized in certain countries, we took a self-regulatory approach, applying best practices from other leading financial organizations.”

Cryptocurrency platforms, both centralized and decentralized, should “try to analyze their own systems and develop modules specifically designed to meet the needs of today’s regulatory systems”, CryptoFrenchie said.

Read:  Citi Group Appoints Chief of Digital Assets in Surge of Hires of Cryptocurrency Experts

Are decentralized exchanges a threat?

As the debate on self-regulation continues, another has emerged about decentralized exchange platforms (DEXs) and their impact on the market. Decentralized non-custodial exchanges allow users to directly trade directly from their wallets, often without even signing up with an email address.

Some critics have argued that decentralized exchanges render the KYC and AML efforts of centralized platforms useless, since bad actors can carry out their illicit activities through these platforms. Others suggest that DEXs, even those managed through decentralized autonomous organizations (DAOs), can improve their transparency to help blockchain detectives and law enforcement organizations find illicit transactions.

For the investment director of the company specialized in digital assets Arca, Jeff Dorman, decentralized applications (DApps) and other projects can contribute to the security of the cryptocurrency space. Speaking to Cointelegraph, Dorman said the industry needs to set standards, adding:

“Companies and projects have to recognize the importance of establishing transparency dashboards, and analysts across the industry have to go out of their way and do the dirty work of bringing transparency to projects that are not doing it themselves.” .

Bittrex’s Stonberg noted that the “The best way to hide illicit activity is not cryptocurrencies, but the money of yesteryear.” The CEO added that blockchain-based transactions are “more traceable than any other financial activity.”

Stonberg told Cointelegraph that he believes decentralized exchanges should come up with AML and KYC policies that they can implement, but added that the industry is “still in the early stages of seeing how decentralized exchanges will fare.”

Lutskevych suggested that tools that can trace the origin and history of crypto assets could one day be used on decentralized exchanges to keep illicit funds away from their platforms. Noted that “Basic information can be traced” on the blockchain, although that data is “a long way from what the Financial Action Task Force’s guidance requires centralized exchanges to collect.” Lutskevych added:

“Decentralized mechanisms are currently being explored and developed that can prevent funds of illicit origin (money laundering, ransomware, hacks) from entering a DEX with a protocol smart contract.”

Lutskevych concluded that it is possible for decentralized platforms to take advantage of KYC and AML procedures to respond to regulators’ concerns. He noted that implementing KYC alone may not be enough to deter illicit activities and protect users.

Raj Badai, founder and CEO of traditional banking and DeFi services bridge Scallop told Cointelegraph that The growth of the decentralized financial industry poses a challenge for regulations, but suggested that a solution could be a “regulated blockchain.” Referring to products under development, Badai said:

“We can ensure that wallets on a blockchain undergo a KYC / KYB process. This means that the account holder is identified and that all on-chain funds can be tracked, ultimately creating an environment inhospitable to illicit activities and deters you from the start. “

Fundamental rights for cryptocurrency users

Recently Binance seems to have weighed in on the issue by posting what it called “Fundamental Rights for Cryptocurrency Users”. The exchange argued that every human being should “have access to financial tools” that “allow greater economic independence.” He also noted that “responsible crypto platforms have an obligation to protect users from bad actors” and implement KYC to “prevent financial crime.”

Commenting on Binance’s proposed rights push, Lutskevych suggested that the move was an “advertising campaign” by a company “that did not start touting these values ​​until very recently.” so it is more of a “marketing strategy”.

Through a website dedicated to the fundamental rights of cryptocurrency users, Binance appealed to industry leaders, regulators, and policy makers to “Help shape the future of global finance together.” The exchange added that it believes it should be “It is up to the policy makers of each nation and their constituents to decide who should oversee the industry.”

According to Binance, “cryptocurrencies belong to everyone.” Although the platform believes regulations are inevitable, any policymaker tasked with overseeing space has a monumental task on their hands, as keeping bad actors at bay without stifling innovation has proven to be quite a challenge so far.

The strategy that cryptocurrency companies seem to agree on is based on cooperating with regulators to find solutions that do not prevent users from accessing innovative digital currencies or services created within their ecosystem. Regulators’ lawsuits against large cryptocurrency companies appear to show that only one party is willing to cooperate.

Keep reading: