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OECD advisor: Cryptocurrency exchanges are over-regulating themselves

Posted: 28 February 2018 5:30 pm
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Legal ambiguity has cryptocurrency exchanges strictly self-regulating more effectively than many banks.

Cryptocurrency exchanges have been doing above-par due diligence, says Joseph Weinberg, a special adviser to the multinational Organisation for Economic Co-operation and Development (OECD) think tank, and chairman of the Shyft Network, which focuses on improving the effectiveness of KYC/AML compliance.



"Most crypto exchanges that are processing fiat to crypto transactions are very compliant and in some cases, even more so than banks," Weinberg said. "For example, a recent review stated that Australian banks make potential customers go through a less stringent due diligence process than crypto exchanges... For crypto exchanges, the challenge lies in how little formal guidelines that are from regulators. As a result, most of the industry has been doing self-compliance in absence of clear procedures. To err on the safe side, crypto exchanges over-regulate themselves."

In Australia, one part of this self-regulation is the Australian Digital Commerce Association, whose members voluntarily operate in line with strict standards and have the option of undergoing independent external audits to prove it.

Voluntary self-regulation around the world

This phenomenon of strict self-regulation, coupled with somewhat vague regulatory feedback, isn't unique to Australia. It's being seen around the world. Binance CEO Changpeng Zhao noted the same issues following China's October 2017 cryptocurrency crackdown.

"Basically, the Chinese government issued a warning that exchanges needed to shut down, so we shut down our Chinese users," Zhao said. "It is important to note that the Chinese government is not a single entity, there are a lot of people involved and there are a lot of different branches and different offices. Nobody knew what Binance was supposed to do. It’s all very high level and very vague... No one told us to shut down the exchange for Chinese users, but we just did it to show that we are cooperative."

And over in Korea, regulators may have become aware of this movement. There, the very mention of heavy-handed top-down regulations caused a lot of consternation and a little bit of rioting, which might be why regulators are now approaching cryptocurrency with a deliberately light touch and seeing how the system self-regulates itself before passing more potentially ambiguous laws.

No business wants to operate in a legal grey area if it can help it, so the lack of clear regulations has led many cryptocurrency exchanges to over-regulate themselves to err on the side of caution and to demonstrate their commitment to legitimate operations.

But it might not help that cryptocurrencies have a shady reputation and a history as the chosen payment method of criminals. But as Weinberg points out, the reputation might be undeserved.

Crooks don't want to end up on the blockchain

"Money laundering is not unique to the crypto markets—it is prevalent in most financial markets and therefore should be expected in crypto markets as well," Weinberg said. "Most people mistakenly see the pseudo anonymity of cryptocurrencies like bitcoin and presume that it is a great mechanism for money laundering, when it is actually the opposite and probably one of the worst ways to facilitate these types of activities."

The difference lies in how inherently easy it is to track most cryptocurrencies. In most cases, anyone can simply follow the money without any particular experience. As an added bonus, people can be confident in the immutability and clarity offered by blockchain ledgers. For example, we can say with almost complete confidence that the mysterious hacker who deposited $17.4 million of Ether into an account was the same person that stole it in the first place.

"Bitcoin and most other cryptocurrencies are highly-trackable and provide pure, immutable transaction trail histories. With the amount of centralized crypto transaction centers, such as exchanges, this means that within a few points of separation, most coins are highly traceable. Of course, there are security coins such as ZCash and Dash that change this on the protocol level. And as any new technology grows, so do its use cases—both in good and bad ways," Weinberg said.

More security than any bank vault

Decentralised systems, such as you get with most cryptocurrencies, also bring an element of security in themselves. Even if someone wants to, it's mostly impossible to trick, hack or social engineer a properly decentralised network. This is exactly why Ripple, a cryptocurrency that's committed to working with the banks, is taking steps to decentralise and bring its systems beyond any entity's control.

It's also why companies are starting to run KYC/AML compliance business solutions along the public bitcoin and Ethereum blockchains; decentralisation is the best security that money can't buy.

When you look at how most money laundering occurs, it's easy to see why banks are moving towards blockchain systems as a way to prevent it while decreasing their increasingly painful compliance and security expenses.

As Weinberg said, "compliance costs keep multiplying and yet, they aren’t always found to be effective."

But cryptocurrency exchanges, cautiously operating in a grey area and with a little bit of a technological leg-up, might be handling it very effectively. Cryptocurrency exchanges are the gateway between fiat money and cryptocurrency, and seem to be much more effective door guards than most existing banks.


Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, SALT and BTC.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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One Response

  1. Default Gravatar
    jmarcMarch 2, 2018

    The legal reforms around the virtual bitcoin money take form this year. It is encouraging for me who thought to empty my wallet of crypto currency on mycrypto-invest. After this decision, I go on and I even intend to double my investments.

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