How Is the Crypto Industry Adapting to Regulatory Demands and Scrutiny?by Rebecca Oi December 13, 2023
In recent years, the world has witnessed a rapid rise in the popularity and adoption of cryptocurrencies. As this digital revolution continues to reshape the financial landscape, it is crucial to examine the future of the monetary system and address the challenges the crypto industry faces.
In an exclusive interview with Fintech News Singapore, Marc Temple, Global Development Director at LexisNexis Risk Solutions, delved into the increasing demands and scrutiny of multi-jurisdictional regulatory requirements for cryptocurrencies, the industry’s fragmented approach to risk and compliance management, the threat of reputational damage, and strategies to identify and neutralise bad actors in the crypto landscape.
Adherence to regulatory mandates
With increasing demands and scrutiny from multi-jurisdictional regulatory bodies, the current state of the crypto industry’s preparedness to adhere to ever-changing mandates is a matter of concern. Marc emphasised the dynamic nature of the crypto industry, indicating that preparedness has likely evolved.
“The crypto industry is comparatively unprepared as there is a need for tools and systems specifically designed to adapt to different regulatory frameworks easily,” explained Marc.
Considering that the crypto industry has likely continued to evolve in response to regulatory changes is essential. The key to adhering to these ever-changing mandates is to enable compliance teams to remain agile and have the ability to recalibrate or reconfigure their financial crime compliance processes.
The crypto industry faces increasing scrutiny, as demonstrated by the numerous fines imposed on crypto firms for failing to implement adequate anti-money laundering (AML) and transaction monitoring provisions.
These fines highlight the urgent call for the industry to prioritise compliance measures and enhance its ability to detect and prevent financial crimes.
Fragmented approach to risk and compliance management
Critics argue that the crypto industry employs a highly antiquated and fragmented risk and compliance management approach.
Marc acknowledged this criticism, attributing it to the industry’s adoption of outdated compliance practices from traditional finance (TradFi). He explains that this has led to a multi-vendor approach, resulting in a fragmented view of risk throughout a customer’s lifecycle.
One of the primary challenges hindering a unified approach is the reliance on legacy technology stacks and multiple integrations. Many crypto firms have built their systems on outdated infrastructure that lacks the necessary capabilities to manage risk and compliance effectively.
These legacy systems often require extensive manual effort to gather and piece together relevant information from disparate sources. This increases operational costs and hampers the ability to make informed customer decisions.
“To address this challenge, there is a need for modern, integrated technology solutions that can unify various data attributes, including Know-Your-Customer (KYC) information, AML risk exposure, and individual transaction data,” said Marc.
“By consolidating this information into a single platform, crypto firms can streamline their risk management processes and avoid the inefficiencies associated with a “swivel chair” approach, where investigators and compliance teams must navigate multiple systems to gather the necessary data,” he added.
The threat of reputational damage in the crypto space due to unforeseen risks is highly significant. In an industry where its reputation and credibility are being thrust into the limelight almost daily, ensuring that effective financial crime risk prevention measures are in place is crucial to helping ensure trust among customers, investors, and regulators.
Marc recommended implementing robust risk detection controls and processes. He emphasised the importance of advanced technology solutions to detect and prevent financial crimes, highlighting the need to stay updated with evolving regulations and compliance requirements.
“This involves adopting integrated technology solutions that can effectively identify and mitigate risks associated with financial crimes across the entire customer lifecycle, such as money laundering, fraud, and terrorist financing,” said Marc.
By investing in advanced technologies, businesses can enhance their ability to detect and prevent illicit activities, safeguarding their reputation.
Furthermore, businesses need to stay abreast of evolving regulations and compliance requirements. The crypto industry’s regulatory landscape is constantly shifting, and what may have been considered sufficient may no longer meet future regulatory standards.
Therefore, businesses must proactively adapt to changing regulations and ensure their risk prevention measures align with the latest compliance frameworks. This may involve regular reviews and updates to internal policies, procedures, and technology systems.
Detecting risk-associated wallets
The crypto industry continuously races to identify and neutralise bad actors, which presents inherent challenges. Marc emphasised the importance of a comprehensive understanding of good customers and the tactics of bad actors. Continuous monitoring is essential as even initially “good” customers can potentially turn bad.
Bad actors and criminals will utilise many approaches to bypass or circumvent verification processes. Gathering information about customers’ identities, location, exposure to money laundering risk, and their transactional patterns and behaviours is crucial.
“By collecting and analysing these data points, crypto platforms can establish a more accurate profile of each customer and identify potential red flags associated with risky activities,” highlighted Marc.
It is worth noting that even customers initially considered “good” can potentially turn bad or have their accounts compromised by bad actors. Bad actors can pay someone to use their accounts or hire someone to create bank accounts.
As a result, continuous monitoring becomes crucial. Implementing effective ongoing monitoring systems allows crypto platforms to detect suspicious activity promptly.
Proactive risk detection strategies
Marc advocated for a comprehensive customer profile approach to achieve proactiveness in identifying potential criminal activity in the crypto world. He noted that automation alone is insufficient, especially when dealing with diverse jurisdictions and regulatory requirements.
An effective solution lies in adopting a concept called “risk orchestration” – a dynamic approach to managing risks across the customer lifecycle.
“From account creation to payments, it identifies potential criminal activity while allowing adaptability to emerging risks and fraud typologies as they surface. The crypto industry can enhance its ability to detect and mitigate criminal activities by implementing risk orchestration,” said Marc.
Staying ahead of criminals
In the ever-evolving landscape of technology and the sophistication of criminals, staying ahead in identifying risk-associated wallets is a challenge that LexisNexis Risk Solutions takes seriously.
Marc explained that they prioritise agility and adaptability in their risk detection models. They actively engage with customers, strategic partners, and regulators to ensure they remain at the cutting edge of detecting risk-associated transactions on and off-chain.
By integrating KYC information, fraud detection models, AML risk screening, and transactional behaviour analysis across both fiat and crypto domains, they are firmly positioned as vital partners to ensure their customers can protect themselves.
Staying ahead requires a collaborative approach that involves sharing expertise and intelligence to evolve and adapt to the changing threat landscape continuously.
Achieving proactiveness in risk detection and staying ahead of criminal actors is crucial for ensuring cryptocurrencies’ long-term sustainability and credibility in the global financial system. As the crypto industry matures and adapts, it can transform how we think about money and finance in the digital age.