Prevent adoption?Balancing encryption security and innovation

The cryptocurrency field has developed so rapidly that a new trend emerges every year: from the initial coin product (ICO) to the non-fungible token (NFT), only a few years have passed. Faced with such amazing innovations, encryption companies and regulators are facing an increasing challenge: balancing security practices with new products and features.

Some companies’ approach is to move quickly and adopt new innovations when available, with security processes such as Know Your Customer (KYC) and Anti-Money Laundering (AML) as secondary goals. The popular cryptocurrency exchange Binance seems to have been using this strategy until this year when regulators began to crack down on it.

Binance’s KYC policy initially allowed users who did not fully verify their identity to log out Up to 2 BTC per dayThe exchange lists the margin trading pairs of major legal currencies and allows its futures trading platform to leverage up to 125 times, but it must Reduce available leverage with Delisting Margin Trading Pair When it is reported Be investigated By the U.S. Internal Revenue Service and the Department of Justice.

Since then, the exchange has adopted a compliance-friendly approach to its business and implemented a mandatory KYC process for “global users, for each function.”Act seen Lost about 3% of total users counting.

Although Binance was forced to cancel some of its products and reduce the leverage of its platform, other exchanges are still offering these same products to users. In an interview with Cointelegraph, Yuriy Kovalev, CEO of the crypto trading platform Zenfuse, pointed out that finding regulations that allow compliant companies to compete is a challenge that needs to be addressed:

“It is difficult to find a way to balance the regulation of investor protection and innovation, especially in areas where new financial products appear every few months.”

In an interview with Cointelegraph, the CEO of cryptocurrency exchange Bittrex Stephen Stonberg pointed out that cryptocurrency regulations are now “very complicated” and are handled differently in different jurisdictions

Stonberg hinted that, despite this, customer security should still be the top priority, because “stronger and clearer supervision is needed—just like in traditional finance—to truly ensure the security of customer assets and data.” For example, Stonberg referred to Liechtenstein’s Blockchain Act, which “provides more certainty and clarity on how exchanges need to attract new customers and protect customer assets.”

Some players in the industry believe that regulatory clarity is necessary because without it, innovation may be left behind. In a recent blog post, Coinbase, a NASDAQ-listed cryptocurrency exchange, pointed out that its plan to launch a loan program was stopped by the U.S. Securities and Exchange Commission (SEC). Threatened to sue it “Never say [them] why. “

Coinbase stated that it tried to have “fruitful engagement” with the SEC, but never received clarification about the SEC’s reasoning or how to change the product to make it compliant. The proposed alternative involves excluding regulatory agencies.Commodity Futures Trading Commission (CFTC) Commissioner Brian Quintenz once supported this alternative Call up Cryptocurrency exchanges conduct self-regulation, which echoes the views of many in the industry.

Is self-discipline a viable option?

The concept is not new: organizations such as the Financial Industry Regulatory Authority (FINRA) have used brokers and broker-dealers to help implement measures aimed at protecting securities investors. In Japan, as the self-regulatory agency of the country’s cryptocurrency trading department, Japan Cryptocurrency Exchange Association (JCEA), Already formed.

Stonberg doesn’t believe that the answer lies in the path of self-regulation, because “the complexity of this digital ecosystem makes regulation tricky.” For him, self-regulation means “releasing” all the hard work that has been achieved in crypto regulation. And “complicate the regulatory environment again and prevent progress.”

The anonymous founder of Flare Finance CryptoFrenchie, a decentralized finance (DeFi) platform based on the Flare Network, told Cointelegraph that he believes that “decentralized platforms and centralized platforms can provide a self-regulatory environment that can effectively meet (or exceed) ) The need for modern regulatory requirements.”

The founder of the DeFi project added that the current system “has been proven to be unable to meet the needs of the current financial system”, adding:

“Applying these same systems to a faster-paced environment like encryption may prove that its potential is more suffocating than support.”

Oleksandr Lutskevych, the founder and CEO of cryptocurrency exchange CEX.IO, suggested that self-regulation may be an option, and stated that based on the company’s experience, self-regulation is the answer “when there is a lack of a suitable regulatory framework”. Lutskevych said to Cointelegraph when talking about his company’s development path:

“Before certain countries/regions formally formulated a cryptocurrency framework, we adopted a self-regulatory approach and implemented the best practices of other leading financial organizations.”

CryptoFrenchie said that cryptocurrency platforms, whether centralized or decentralized, should “seek to analyze their own systems and develop modules specifically designed to meet the needs of current regulatory systems.”

Does decentralized exchange pose a threat?

Although the debate about self-discipline continues, another debate about decentralized trading platforms and their impact on the market has developed. Non-custodial decentralized exchanges allow users to trade directly from their wallets, often without even registering an email address.

Some critics believe that decentralized exchanges (DEX) render the KYC and AML efforts of centralized platforms worthless because bad actors can conduct illegal activities through these platforms. Others suggest that DEX, even those decentralized exchanges run through decentralized autonomous organizations (DAOs), can increase their transparency to help blockchain detectives and law enforcement agencies detect illegal transactions.

For the chief investment officer of digital asset investment company Arca Jeff Dorman, decentralized applications (DApps) and other projects can contribute to the security of the cryptocurrency space. In an interview with Cointelegraph, Dorman stated that the industry needs to develop standards, adding:

“Companies and projects need to realize the importance of setting up a transparency dashboard. Analysts across the industry need to roll up their sleeves and do some dirty work to bring transparency to projects that they don’t have to do on their own.”

Bittrex’s Stonberg pointed out that “the best way to hide illegal activity is not cryptocurrency, but old-fashioned currency.” The CEO added that blockchain-based transactions are “easier to track than any other financial activity”.

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

Lutskevych suggested that one day tools that can track the origin and history of encrypted assets can be used in decentralized exchanges to prevent illegal funds from entering its platform. He pointed out that “basic information can be tracked” on the blockchain, although the data “is far from the data collected by centralized exchanges required by the Financial Action Task Force guidelines”. Lutzkiewicz added:

“We are currently exploring and developing a decentralized mechanism that can prevent funds from illegal sources (money laundering, ransomware, hackers) from entering DEX with protocol smart contracts.”

Lutskevych concluded that decentralized platforms can use KYC and AML procedures to address the concerns of regulators. He pointed out that implementing KYC alone may not be enough to prevent illegal activities and protect users.

Raj Bagadi, the founder and CEO of Scallop, a bridge between DeFi and traditional banking services, told Cointelegraph that the growth of the decentralized financial industry poses a challenge to regulation, but the proposed solution may be a “regulated blockchain.” When talking about the product under development, Bagadi said:

“We can ensure that the wallet on the blockchain goes through the KYC/KYB process. This means that the account holder can be identified, and all funds on the chain can be tracked-ultimately creating an unsuitable environment for illegal activities, and Stop it in the beginning.”

Basic encryption rights

Binance recently seems to weigh this topic by publishing what it calls “the fundamental rights of encrypted users.” The exchange believes that everyone should “access financial instruments” and “allow greater economic independence.” It also pointed out that “responsible encryption platforms have an obligation to protect users from bad actors” and implement KYC to “prevent financial crimes”.

Commenting on Binance’s promotion of encryption rights, Lutskevych stated that the move is an “advertising campaign” of a company that “has only recently begun to promote these values,” making it more like a “marketing strategy.”

Via website Committed Regarding the basic rights of crypto users, Binance calls on industry leaders, regulators, and policymakers to “join together to help shape the future of global finance.” The exchange added that it believes that “policy makers in each country and their voters should decide who should supervise the industry”.

related: The scourge of stablecoins: regulatory hesitation may hinder adoption

Binance wrote that encryption belongs to everyone. Although the exchange believes that regulation is inevitable, any policy maker responsible for overseeing this area has a difficult task to accomplish, because so far, stopping bad actors without stifling innovation has proven to be a challenge .

The strategy that cryptocurrency companies seem to agree with is based on working with regulators to find solutions that will not prevent users from accessing innovative digital currencies or services created in their ecosystem.Regulatory Authority Lawsuits against large crypto companies It seems that only one party is willing to cooperate.