How can cryptocurrency businesses work with stakeholders in government and traditional finance to make the industry safer and ensure continued growth? That’s the question we wanted to answer at our first ever Chainalysis Links conference on November 15. We gathered over 150 of our customers and partners from cryptocurrency businesses, law enforcement, regulatory agencies, and financial institutions to discuss the changing compliance landscape.
Make no mistake. Solving the compliance puzzle is the only way for cryptocurrency businesses to operate globally and attract the investment necessary to continue their current growth. As our CEO Michael Gronager explored in his keynote, finance professionals recognize the vast potential of cryptocurrency, with nearly half of those surveyed picking Bitcoin to have a higher growth rate than stocks, fixed income bonds, or housing prices over the next year. But despite that, most said that concerns around compliance are holding them back from investing in the space or working with cryptocurrency clients.
Links was our chance to attack this problem from all sides and learn how cryptocurrency businesses, governments, and financial institutions can work together more effectively. Here are some of the key takeaways.
Align on shared goals
If your goal is to build a business, anything that doesn’t directly help you grow can feel like a distraction. That’s why it’s so easy for cryptocurrency companies to look at regulations such as those highlighted in FATF’s recommendations earlier this year as burdensome. The conventional narrative of cryptocurrency as inherently illicit or anti-government also adds to the adversarial dynamic.
But that attitude is ultimately unproductive and ignores the reasons these laws exist in the first place.
As FinCEN director Kenneth Blanco reminded us in his keynote address at Links, financial regulations serve a crucial, real world purpose. “[These regulations] are important to the lives of millions of people, the innocent and the most vulnerable, victims or potential victims of crime.” Financial crimes impact so many, from elderly scam targets to those affected by the drug trade. Regulators aren’t interested in hurting cryptocurrency businesses or holding back the industry — they simply need to protect these potential victims. The cryptocurrency industry needs to align with regulators to accomplish that goal, not just because it’s the right thing to do, but also because doing so is the only way for them to accomplish their own business goals.
None of this is to say that complying with financial regulations is easy for cryptocurrency businesses. The rules are complex, and enforcement changes across the different jurisdictions they may operate in. But there’s more than enough room to accommodate the rules and still build a successful business.
Compliance also doesn’t have to be a challenge you take on alone. Financial institutions like your bank have been working with regulators for years, and can help you understand how to apply their compliance frameworks to your business. Paxos General Counsel and Chief Compliance Officer Dan Burstein even compared his bank to a global regulator on one panel, expressing thanks for the way it helps his company follow compliance best practices around the world.
Educate your banking partners
Of course, your bank needs a deep understanding of your business in order to help you with compliance. That’s why cryptocurrency companies need to adopt an open attitude and be willing to educate their financial providers on what they do.
Michelle Sabins explained this dynamic well during our Links panel on how cryptocurrency businesses can build trust with banks. As Senior Vice President and Managing Principal at Silvergate Bank, Michelle helped lead her bank’s efforts as it became one of the first to start taking on cryptocurrency business clients in 2013.
She remembers that when she first began working with the space, many cryptocurrency businesses adopted the tactic of constantly tweaking their business model to get around regulations, sometimes not telling Michelle until after the fact. Unsurprisingly, this made them difficult to work with. The more successful relationships, on the other hand, were with cryptocurrency businesses who were up front with Silvergate on their offerings and strategy. This in turn enabled Silvergate to provide more tailored compliance advice and even explain clients’ businesses to regulators on their behalf. The need for education remains important whenever clients offer new cryptocurrency products, as well as during onboarding. “We have to be able to answer the questions regulators ask, so we have to collaborate with our clients…it’s not because we’re trying to be nosy. It’s so we can put the proper controls in place to monitor and report suspicious activity when we need to.”
Seek opportunities to work with regulators
Knowledge sharing doesn’t just happen between you and your bank. Cryptocurrency businesses can also benefit from going straight to the source and getting more information from regulators about their obligations.
But these engagements aren’t a one-way street. You have to form true partnerships with regulatory bodies in order to maximize their usefulness. Why? Part of it goes back to the education point. You have to be able to teach regulators about your business in order to get compliance guidance tailored to your situation. Rules like those covered in the Bank Secrecy Act are meant to apply to all money transmitters, which covers a broad swath of financial services businesses — it isn’t feasible for regulatory agencies to have guidance ready-made for your cryptocurrency business, especially considering how often the industry changes and pushes out new products. Not only that, but by partnering with regulators, you can guide them through future developments in the industry and help the government craft more effective legislation governing the space.
Luckily, as our government speakers showed at Links, there are several ways to get involved. Valerie Szczepanik, who heads up the SEC’s Strategic Hub for Innovation and Financial Technology, directed attendees to resources her organization offers, such as opportunities to comment on recent enforcement decisions, local meet-ups, and other opportunities to meet with regulators. James McDonald of the U.S. Commodities Futures Trading Commission pointed out similar opportunities with his organization, as did other attendees representing regulatory bodies around the world.
Regulators can benefit greatly from the expertise of a cryptocurrency compliance professional just as you can benefit from their knowledge of how these laws are crafted and enforced, so don’t be afraid to take advantage of these opportunities. “With the speed at which money moves today, we can’t afford not to work together,” said IRS Criminal Investigation Division Chief Don Fort.
Step up and start building trust
The cryptocurrency industry is still in its early stages, and it’s incredible to consider the growth we’ve achieved so far. But the next phase will require greater partnership with regulators and traditional finance — the cryptocurrency businesses who lead the way on that front will put themselves in the best position for sustained success.
As FIU Netherlands Director Hennie Verbeek Kusters explained on one panel, the industry also needs to think about motivations beyond business success. “It’s important to identify what you want to be in history. Do you want to assure that the business you build isn’t going to be abused by criminals and terrorists? Make up your mind. If you don’t want your business to be abused, then step forward.”