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Of the many challenges faced by cryptocurrency in gaining legitimacy, working out exactly how cryptocurrency exchanges fit into existing legal frameworks has been among the greatest. Fortunately, many jurisdictions have altered their regulations to try to fit in the exchanges. Without much by way of a uniform global approach, though, committing to cryptocurrency exchange compliance will differ from country to country.
In and of itself, such a barrier can hinder the whole crypto sector. Cryptocurrency exchanges are there to make the likes of Bitcoin and Ethereum publically accessible, freely tradable, and liquid by acting as an intermediary. The process is made simple for anyone who wants to get in, whether it’s a centralized (CEX) or decentralized (DEX) exchange. So, to ensure that crypto continues to gain momentum, cryptocurrency exchange compliance is essential.
Achieving cryptocurrency exchange compliance varies around the world, but it remains an essential step for any business in this complex industry. Here, we’re exploring the different ways to navigate cryptocurrency exchange compliance as well as how to achieve it and how it differs in major regulatory markets.
How to Navigate Crypto Regulation
When trying to navigate and comply with crypto regulation, let alone regulations for cryptocurrency exchanges, you always need to have an approach of being comprehensive and proactive. To help to adhere to crypto regulation, here are some general bits of advice to help you to ensure the compliance of an exchange:
- Build a Compliance Team: With a dedicated team of experts in the field and continued sessions of training, you can help your business remain compliant with crypto regulation. The team would ideally feature experts in cryptocurrency laws, risk management, financial laws – a part that our experts at InteliumLaw can assist with – and cyber security, as well as seasoned compliance officers. Having additional advisors on legal matters and people who can perform internal audits will also help a lot.
- Create and Update a Compliance Manual: From the outset, you should draft a manual of how the business should act to meet the requirements of compliance, procedure, and crypto regulation guidelines. From there, you’ll need to update the standards as regularly as the legal framework around the sector changes. You’ll also need to adhere to any documentation and recording requirements of the regulators.
- Establish Governance and Risk Management: By creating a framework for compliance governance within your firm, you can clearly establish the responsibilities and accountabilities of staff should the business infringe any crypto regulation. This will ensure that staff members strive to stay on top of compliance. To help with this, it’s worth implementing a risk management program that will better allow you to mitigate any risks.
- Review and Audit Regularly: Performing internal audits, hiring independent auditors, and continually reviewing your crypto regulation processes will only make upholding compliance easier and more streamlined.
- Monitor and Remain Adaptive: The key to staying on top of crypto regulation is being adaptive. Regulations around the relatively new technology continue to change, so your business needs to be ready to adapt as they do. You can see a prime example of this occurring in Estonia. Once a coveted place for crypto businesses, their laws had to swiftly shift to meet the new financial climate. While getting a crypto license in Estonia is still coveted, compliance became more difficult in 2022 – just five years after the country became a favourable regulatory environment under the FSA.
Achieving Compliance for Cryptocurrency Exchanges
Due to the sheer complexity of the product at hand, achieving compliance for cryptocurrency exchanges can be quite a difficult task. Still, even in jurisdictions where the rules of managing a crypto business aren’t clear-cut, it’s important to analyze the regulations put forth by the country’s financial authority. More generally, compliance for cryptocurrency exchanges will be underpinned by these measures:
- AML and KYC: It’s integral for all cryptocurrency exchanges to run thorough know your customer (KYC) verification procedures before allowing a user to exchange any currencies on the platform. Just as importantly, anti-money laundering procedures need to be in place to sound the alarm whenever suspicious transactions take place. These may seem like extra barriers to onboarding new users, but ultimately, they work to safeguard your cryptocurrency exchange just as much as they help stave off financial crimes.
- Register and Get Licensed: Always review the country that you’re setting up in for any route to getting a license and where financial service companies need to register. This might mean that you need to get a crypto license and become a registered financial institution, but this is to be expected of compliance for cryptocurrency exchanges. Wherever you plan to setup in the world, the InteliumLaw team is ready to help you with this step towards being compliant as a cryptocurrency exchange.
- Privacy and Data Protection: In recent years, privacy and data protection rules have become very important. In the UK, it’s down to GDPR, and elsewhere, you have CCPA and PIPEDA to deal with. Ensuring compliance for cryptocurrency exchanges in these areas is as essential as it is for any other digitally-based business, so you need to implement measures that will guarantee the privacy and data protection of your users.
- Protect the Customer: Compliance for cryptocurrency exchanges will naturally extend into the bracket of consumer protection regulations. You’ll need to prove that your platform can provide dispute resolution, channels for user input, and deliver timely information on aspects such as fee schedules. Further, fair trade practices and fraud prevention measures will need to be enacted to achieve compliance and protect your customers as much as possible.
How Are Crypto Exchanges Regulated in Different Countries?
Are crypto exchanges regulated is a common question, and an understandable one given the fractured nature of crypto legislation and governance around the world. Unfortunately, the answer differs between any given set of jurisdictions. Here’s how crypto exchange regulation looks in some key markets:
- Canada: Here, the Canadian Securities Administrators and Investment Industry Regulatory Organization of Canada are tasked with ensuring that crypto exchanges are regulated. Further, some Web3 and crypto firms will need to register and comply with the rules of the Financial Transactions and Reports Analysis Centre of Canada.
- China: China is the second-largest economy on the planet and seems to be quite tech-forward. Yet, when it comes to the case of how are crypto exchanges regulated in China, the conclusion is that they aren’t. Instead, crypto businesses are expressly prohibited, and people in China aren’t allowed to own cryptocurrencies.
- European Union: Here, MiCA now rules. These regulations require all cryptocurrency exchanges to be authorized before they offer their product to the EU’s shared market. It offers a clear example for answering “yes” to the inquiry of are crypto exchanges regulated, as MiCA also established essential rules for platforms in regards to performing regular audits and risk management.
- Japan: The Payment Services Act of 2009 recognizes cryptocurrencies as legal property and cryptocurrency platforms as financial services. As such, they need to keep up with AML and CFT regulations, register with the Financial Services Agency, and now become a member of the Japanese Virtual Currency Exchange Association.
- United States of America: Anyone wondering how are crypto exchanges regulated in the United States will soon find that exchanges are tightly regulated there. Through the Ensuring Responsible Development of Digital Assets Executive Order enacted in 2022, the president defined several governing bodies for crypto and tasked them with aggressively pursuing regulatory compliance within the digital assets sector.
Importance of AML and KYC for Regulated Cryptocurrency Exchanges
With any kind of crypto business, especially ones like cryptocurrency exchanges or new Bitcoin casinos, you have to adhere to AML and KYC regulations. Invariably, regulated cryptocurrency exchanges will need to perform comprehensive know your customer checks and abide by anti-money laundering frameworks.
Doing so doesn’t just help regulated cryptocurrency exchanges remain compliant. These measures also provide benefits to the business, as follows:
- Reducing the risk of identity theft, financial fraud, and other financial scams and, in turn, building trust among users by protecting their accounts, data, and information.
- Regulated cryptocurrency exchanges that adhere to and emphasize AML and KYC practices will only help to promote growth and mainstream adoption in the industry.
- Scrutiny from increasingly savvy regulators will only continue to increase as cryptocurrencies become more commonplace. Remaining compliant with AML and KYC rules will enable regulated cryptocurrency exchanges to continue their operations and avoid penalties.
Compliant and regulated cryptocurrency exchanges may have to be flexible to a whole variety of rules around the world. Yet, doing so absolutely puts the business and, in part, the wider Web3 industry in much firmer standing than those that operate outside of the bounds of regulations.
