BitMEX, OKEx, KuCoin Scandals Highlight the Need for Better Regulation

Money makes the world go round, but regulations are what separate the legitimate from the illicit, providing a framework that assures safety, fairness and transparency.

Every industry views regulation as a necessary, albeit occasionally bothersome, element of doing business: the rules are indispensable for ensuring consumer protection and creating a level playing field.

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And yet the world of cryptocurrencies has a compliance problem, as indicated by the recent scandals involving major exchanges like BitMEX and OKEx. It’s time for change.

Scandals Continue to Plague Major Exchanges

Many of the industry’s high-profile trading platforms have fallen foul of regulators over the years. One recent example was high-leverage derivatives platform BitMEX.

Earlier this month, the U.S. Commodity Futures Trading Commission (CFTC) charged the company’s owners with operating an unregistered trading platform and violating multiple CFTC regulations.

Its executives – including CEO Arthur Hayes – were also accused of violating the Bank Secrecy Act.

OKEx and KuCoin haven’t fared much better; the former moved to suspend cryptocurrency withdrawals after its founder was arrested by police.

Apparently because the man in question, Xu Mingxing, is one of the platform’s private key holders and thus essential to the transaction authorization process.

Imagine a bank telling users they couldn’t withdraw cash because their CEO had been detained! Unsurprisingly, the value of OKEx’s native exchange token plummeted as a result.

Singaporean exchange KuCoin, meanwhile, recently lost over $200 million worth of customer funds in a sophisticated hack, yet another blow for the industry’s reputation.

Evidently, clearer and more robust regulation could have prevented the first two scandals. Frauds perpetrated upon exchanges may be more difficult to forestall, though a proper regulatory framework might ensure that platforms are obligated, at the very least, to insure customer deposits.

Lack of Compliance Makes Cryptos Untrustworthy

Although the crypto industry has come a long way since the publication of the Bitcoin whitepaper in 2008, with healthy competition among trading platforms, wallets, blockchains and decentralized applications (dApps), compliance remains scattershot and regulatory battles often reflect poorly on crypto companies.

Some major players have even been forced to pay hefty fines, mostly for carrying out illegal unregistered securities sales or underreporting. In some cases, crypto companies have been charged with failing to prevent money laundering.

Whether it’s tokenized projects getting their knuckles wrapped for failure to disclose insider sales or exchanges facing censure over wash trading, the topic is never far from the news.

The simple fact is that cryptocurrencies aren’t deemed trustworthy by the general public, largely due to a lack of oversight. 

Sadly, one of the first things people think when they hear “cryptocurrency” is scam, and the mainstream media does its part to push this narrative – which doesn’t help.

Even so, if more crypto services were regulated, the clarity conferred would benefit the entire industry from a reputational standpoint. 

Say what you will about stock and securities exchanges, but the laws that govern activity in those markets reduce the likelihood of scams and frauds and enforce financial stability.

To Regulate or Not

Not all crypto companies eschew regulation. In some cases, similar projects are in different ballparks where compliance is concerned.

The world’s most-widely used stablecoin Tether (USDT), for instance, is unregulated while USD Coin (USDC) and Paxos (PAX) are fully backed and regulated.

By the same token, some exchanges devote efforts to securing regulatory licenses while others operate without doing so, or elect to register in a remote territory with little oversight – hence the number of exchanges headquartered in those mighty financial centers, Seychelles and Cayman Islands.

Of course, waters are somewhat muddied by the regulatory picture itself: in the US there are no federal laws on cryptocurrency, and guidance varies from state to state.

Incidentally, Bitcoin and Ethereum have been exempted from securities laws due to their decentralized nature.

Facebook’s much vaunted Libra project, meanwhile, has been mired in a regulatory morass since last year; finance ministers and central bankers from the G7 recently ruled that Libra could not be launched until it was properly regulated.

The Pressing Need for Crypto Regulation

Regulation in the crypto space is important if the industry wants to take an important step towards mainstream adoption.

Not only will implementation reduce the number of scams by ensuring services are legit, but it will help to ensure crypto’s unique properties aren’t co-opted for nefarious purposes, such as for money laundering or purchasing drugs on darknet marketplaces.

United States Drug Enforcement Administration (DEA) Special Agent Patrick O’Kain recently said that regulating crypto exchanges is a good thing for law enforcement.

It’s surely also a step in the right direction for the industry as a whole, particularly if it wants to attract more institutional capital. It appears that most crypto exchanges are starting to recognize this, given the majority have introduced – or are in the process of introducing – KYC and AML rules to satisfy compliance requirements. 

The Importance of KYC/AML and the Advent of KYT

Effective Know Your Customer and Anti-Money Laundering regulations are vital for both sides, helping exchanges manage risk and giving users the benefit of greater security.

The approach of policymakers to AML regulation is evolving towards stricter restrictions on a global scale, and it is really no surprise that an example was made of BitMEX.

We will surely see more heavy-handed action against financial institutions who fail to identify customers, scrutinize transactions, and report suspicious activities to the authorities in the years ahead. 

The next evolution of KYC/AML is Know Your Transaction (KYT), a monitoring tool used by blockchain forensic companies such as Chainalysis.

The compliance solution ostensibly provides real-time transaction monitoring of large volumes of crypto activity to flag suspicious actions; non-approved trades also can’t execute without manual review.

A number of platforms have already integrated the KYT system into their platforms, perhaps wary of incurring AML fines further down the road.

If the crypto industry has any intention of piercing the mainstream, key players must take regulation as seriously as they do profits. Only then does it stand a chance of shaking off its reputational baggage.

About the Author

Todd Crosland is the Founder and CEO of CoinZoom, a digital asset gateway for high-frequency traders and casual investors. Prior to this, he served as CEO of Interbank FX, LLC (“IBFX”), a Futures Commission Merchant and Retail Foreign Exchange Dealer registered with the U.S. Commodities Futures Trading Commission. The IBFX management team has decades of legal and regulatory experience working with KYC, AML, OFAC, and FinCEN compliance checks on hundreds of thousands of customers from over 140 countries. 

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