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Tackling Legal Compliances in the Crypto Space

Perhaps the biggest obstacle hindering the mainstream adoption of both the distributed ledger technology (DLT) and cryptocurrencies industries is the lack of regulation surrounding them. Indeed, where there are investors involved, the financial watchdogs across the world would have a close eye fixated on the said industry’s regulatory structure.

The importance of regulations and compliance gymnastics cannot be overstated for virtually any industry on the planet. Be it finance, banking, real estate, fashion, law, IP, all industries are bound by a certain regulatory and compliance infrastructure that are considered to be industry best practices and must be adhered to by all the industry participants so as to ensure they not only continue to remain functional but also ensure the interests of other associated stakeholders are always safeguarded. 

In essence, regulatory compliance can be considered to be a set of guidelines that an organization must follow as part of its wider operations. A few examples of regulations and compliance requirements are observing the guidelines for the Equal Employment Opportunity Commission (EEOC) to ensure discrimination-free hiring practices or staying true to the rules put forward by the Occupational Safety and Health Administration (OSHA) to ensure a safe work environment for employees, among others.

In a nutshell, regulatory compliance is defined as the process when a business or an entity follows state, federal, and international laws or guidelines that are relevant to its business or industry. However, it is worthy of note that such regulatory requirements can vary considerably depending on the size of the business, the industry it is engaged in, etc.

The rising pace of globalization has considerably bridged the distance between countries, companies, and even individuals across the world, and with more and more businesses interacting with each other across different time zones and jurisdictions, the significance of being compliant with regulations and laws has only increased in recent times.

Today, it is standard practice to employ a separate team only for the purpose of being compliant with the global regulations and to ensure the company doesn’t get into the bad books of financial watchdogs. Specifically, the importance of a dedicated compliance officer is growing exponentially along with the increasing interaction of businesses from across borders and continents. The chief compliance officer (CCO) plays a significant role in ensuring the company complies with the immediate and applicable rules, laws, and regulations it is subjected to. In essence, the CCO can be considered as someone who pioneers the company’s integrity, accountability and ethics acumen.

It is also important to note that merely having procedures or regulations in place is not enough to ensure a company is compliant with the applicable laws it must adhere to. Companies must address the loopholes or the existing gaps specific to compliance areas identified in their routine audit checks. In addition, such regulations must be reviewed often so as to ensure they are the most relevant for the current business landscape and in line with the ever-evolving global compliance and regulatory atmosphere.

There are several benefits to having a robust and assertive regulatory approach in hand such as increased goodwill, investor protection, winning the stakeholder’s trust, not breaching any laws, etc. On the contrary, failure to comply with regulations and mandatory principles could result in dire results for the business entity. 

The aforementioned points must have given you a fair understanding of what exactly regulations are and how can an organization deal with them by having subject matter expertise at its disposal. In the next section, we will dive into the rising prominence of regulations and how critical a role they play in determining the future discourse of a company.

On this post, we will touch on some of the partnerships inked by RSK in the regulations and compliance space that make the smart contract platform stand out among its competitors.

Why Are Regulations Important?

There are several particular reasons why regulations can be deemed important for any business organization. Some of these factors we have already touched on earlier such as investor protection, enabling a uniform standard practice across the industry, and others. 

As far as the crypto industry is concerned, it is worth highlighting that the digital asset industry is merely a decade old phenomenon and, as such, does not have any global standard of regulations or laws that all or any crypto entity is expected to obey. In fact, certain businesses such as crypto exchanges and others are typically subject to local rules and regulations with regard to consumer protection, fraud and others.

The apparent lack of regulations and compliance in the digital assets and blockchain space is a significant point of concern that must immediately be adhered to. However, at the same time, it must be ensured the regulations that would be put into place to regulate digital assets and emerging technologies are not draconian in nature and do not kill off the innovation in the industry before it lifts off.  That being said, the importance of regulations and compliance in the crypto space is critical for two very important reasons: institutional approval and mainstream adoption.

Institutional Approval of Digital Assets


While the earlier ethos of digital currencies such as bitcoin (BTC) revolved around the idea of disrupting the status quo, for crypto to be taken seriously by major finance actors around the world, it must win the trust of the institutions. Accordingly, crypto companies must pay special attention to their regulatory and compliance acumen in that its strength will largely dictate the future course of the company and, in fact, for the wider industry as a whole. 

It is for this very reason that today we are witnessing an increasing number of decentralized finance (DeFi) protocols with special KYC pools and suite of offerings for institutional and large investors that are keen on getting some exposure to the rapidly developing sub-industry in the crypto space. 

In addition to the common regulatory and compliance practices such as installing ample anti-money laundering (AML) and KYC mechanisms, crypto companies must also be compliant with several other regulatory and legal issues such as following the local laws in terms of user protection, promoting programs related to the growth of crypto education in the jurisdiction, etc.

In stark contrast to a few years ago, an increasing number of crypto companies such as cryptocurrency exchanges and protocols are now more than willing to comply with all the legal and regulatory mechanisms in the jurisdiction they operate. 

Earlier this year, Coinbase became the world’s first crypto-native public company to trade on a regulated stock exchange (NYSE) signifying the vast distance crypto entities have covered in the last few years from becoming a cult-like Internet phenomenon to getting listed on one of the world’s largest and most reputed stock exchanges.

On the contrary, the large cryptocurrency exchanges by reported trading volume have continually found itself in crosshairs with regulators around the world due to lack of clarity about their physical headquarters, allowing extremely high leverage trading,  dodging regulations,etc.  The regulatory clampdown has been severe from countries such as Singapore, the UK, Hong Kong, Japan, Canada, US, Germany and many others. 

Mainstream Adoption of the Blockchain Economy

For any product, service or offering to go mainstream, it must win the trust of the masses and to that effect, the digital asset space did not have a particularly pleasing start. During the early 2010s (and even to this day), the crypto industry has perennially suffered from poor public perception in that it is widely regarded to be the Wild West that is replete with scams, frauds, rugpulls and alikes.

Building on the gray area between the crypto industry and regulations, in the next section we will attempt to learn in detail what are the most frequent regulatory problems in crypto and the wider blockchain industries.

Common Regulatory Issues with Blockchain and Crypto

Since the inception of bitcoin, a major question mark over the latest asset class’s future was its regulatory status. At the time, and even today, crypto skeptics tend to go back to questions such as will bitcoin or crypto-assets ever be regulated? Is it the regulator’s interests to regulate digital assets? Will too much regulation kill innovation in the blockchain space? Or will lack of regulations cause the emerging industry to implode on its own due to the actions of a few bad actors?

Before answering these questions, it is important to know which are the kind of regulatory issues that the blockchain industry faces as whole. As the technology is a fairly recent one, the kind of possible risks it poses to its users and the world at large are also quite unique in nature.

1) Limited Interoperability Due to Lack of Standardisation  

At present, the vast majority of blockchain networks existing in the world function in isolation and, as such, are not seamlessly interconnected with one another. This lack of connection between blockchains creates a serious problem for regulators as it is literally impossible to create standards that are applicable in uniformity across all blockchains. 

For instance, the same environmental sustainability regulation cannot apply on both bitcoin (BTC) and ether (ETH) once the latter transitions into the proof-of-stake (PoS) consensus algorithm as it would naturally be less energy-intensive in terms of keeping the network running compared to bitcoin’s proof-of-work (PoW) network. This is, of course, assuming that by this time bitcoin does not move the majority of its mining operations to companies that use renewable energy for BTC mining.

That being said, blockchain projects such as RSK are burning the midnight oil to improve blockchain interoperability, specially between bitcoin and ethereum.

2) Limited Integration with Legacy Systems

As blockchain technology is a fairly recent technology, its integration with legacy systems is not entirely seamless yet. To tap the benefits of blockchain technology, companies would likely need to rebuild their data infrastructure from scratch which not only requires a considerable amount of capital to be deployed but also poses the risk of the existing data potentially getting breached by 3rd party firms as blockchain developers are not in abundance in the market yet.

3) Environmental Concerns

As mentioned earlier in part, a major hurdle that could potentially derail blockchain’s ascent to mainstream adoption could be the environmental cost of running a blockchain network. Various studies show that the amount of energy the bitcoin network consumes eclipses the energy consumption of entire nations.

The environmental aspect of cryptocurrencies was recently rekindled by billionaire entrepreneur and the CEO of Tesla, Elon Musk. Just a few days after Tesla announced that it would accept payments in the form of BTC for its electric vehicles, the company reverted its decision to accept BTC payments on grounds that the leading digital currency’s carbon footprint does not justify the utility derived out of it. The company added that once the Bitcoin network’s majority of energy requirements start coming from renewable sources of energy, then it might reconsider resuming the payment support for the orange coin.

4) AML and KYC

Regulators are leaving no stones unturned to ensure that centralized crypto exchanges have the required anti-money laundering (AML) and know-your-customer (KYC) infrastructure in place. Leading crypto exchanges have ample AML solutions in place that closely monitor the inflow and outflow of money to and from the exchanges and ensure that there is no unusual transaction taking place from specific wallets. In the same vein, KYC measures have being largely implemented by exchanges across the world. 

DeFi on the other hand enables users to freely make any on-chain transaction without revealing any personal details whatsoever. Naturally, the DeFi space has attracted considerable attention not only from users but also from regulators that remain worried about the promised benefits of DeFi to the common folks. Subsequently, DeFi protocols are also preparing themselves to get into regulators’ good books.  The recent Compound Treasury requirements is a prime example of how DeFi is willing to work with institutional players as long as they remain a customer only.

As crypto companies and projects begin their journey of pivoting towards financial regulators and complying with the said regulatory requirements, it is important to know the applications that are being used to ensure that lack of compliance does not become the deciding factor that leads to delayed adoption of crypto and blockchain as mainstream forces.

Applications Being Used to Regulate Blockchain Industry 

Just like with any other industry, regulatory and compliance solutions steadily come into place once the industry reaches a certain inflection point in terms of adoption, and the crypto landscape is no different. Compared to a few years ago when the crypto industry essentially functioned as the Wild West with no laws or regulations in place to safeguard the investors and other stakeholders, today there is no dearth of service providers that specialize in crypto-focused compliance and regulatory requirements such as AML & KYC.

In addition to the AML and KYC offerings, there are also projects that provide high-quality on-chain analytics services that enable companies, and sometimes, even regulators, governments and law agencies to keep a close eye over the digital assets being moved around by a bad element from a possible exchange hack, DeFi protocol compromise, etc. 

In the next sections, we will dig deep into the specific projects that are working in the space of AML, KYC and on-chain analytics to ensure the crypto industry remains compliant with the current regulations but not at the cost of innovation.

AML Tools

Cryptocurrencies’ potential use for money laundering has continually been touted as one of the most dangerous aspects of digital assets going mainstream. However, these fears are largely unfounded as has been proven time and again. Despite the low risk of money laundering via crypto assets, supranational agencies such as the Financial Action Task Force (FATF) and others continue to create new requirements that crypto businesses must adhere to in order to prove they are doing whatever they can to mitigate the risk of money laundering.

One of the most well-known and trusted AML solutions in the market today is CipherTrace which was recently acquired by leading payments network Mastercard for an undisclosed sum. Regardless of the acquisition, CipherTrace has been an industry-leading AML solution since the demand for such solutions initially popped up. 

CipherTrace offers a whole host of cryptocurrency compliance solutions for the largest financial institutions and banks, exchanges, and other similar business entities via its best-in-class data attribution, analytics and proprietary clustering algorithms. CipherTrace also partnered with RSK blockchain to boost the latter’s compliance mettle for its wider institutional and mainstream adoption.

Similarly, there is another tool called the Blockchain Explorer Tool that allows users to closely monitor and track transactions associated with digital assets. The Blockchain Explorer Tool aims to leverage the benefits of blockchain technology to their fullest extent to ensure no money is being laundered under the facade of digital coins.

In a nutshell, AML tools such as Blockchain Explorer Tool allows the interested parties to know all the whereabouts of the funds including the source of origin, destination, risk profile, viewing and auditing the transaction history of a given wallet address, tracking double-spend incidents, viewing the Bitcoin network’s mempool status, tracking orphaned blocks and many other things.

KYC Tools

While crypto’s ethos support anonymity and minimal sharing of personal details, the regulators around the world are not the biggest fans of user anonymity and, as such, require centralized exchanges and other similar crypto businesses to collect and securely maintain customer information.

One of the most popular services tapped to ensure KYC compliance is the Sanction Screening Tool that enables crypto firms to investigate their users for any potential involvement in financing crime and terrorism. While users can tap the free version of the product offered by the US Office of Foreign Assets Control (OFAC), there are several extra significant benefits that can be availed in the software’s premium version.

On-Chain Analytics Tools

The concept of on-chain analytics really came to prominence with the rise of blockchain networks such as Bitcoin, Ethereum, RSK and  many others. In essence, on-chain analytics are there not only to help people make informed decisions about their investments but also help regulators and security firms to track the movement of funds from one wallet to another to predict and stop the bad elements from cashing out their digital holdings.

On-chain analytics tools have gained utmost importance especially after numerous incidents of crypto exchanges and DeFi protocols getting hacked by cybercriminals. To date, on-chain analytics platforms such as CipherTrace have helped exchanges and DeFi protocols recover millions of dollars. It is fair to estimate that as more and more blockchains come into the foray for usage, the importance of on-chain analytics will shoot further up.

What is RSK Doing in the Blockchain Regulations Space?

RSK, the leading bitcoin-based smart contracts platform, has been at the forefront of not only following the current global regulations pertaining to emerging technologies such as blockchain, crypto and DeFi but it has also actively engaged with governments around the world to foster a conducive regulatory environment for digital assets so as to make it easier for both institutional and retail investors to get on board with the crypto economy.

RSK has inked several partnerships and alliances with industry-leading compliance and regulation-focused crypto firms that aim to make crypto a regulated asset class without hampering its degree of innovation. These partnerships stay in line with RSK’s vision to foster the smart contract economy built on top of the world’s most secure network while at the same time enabling open finance for the less privileged across the world via its tech-stack (RIF). 

In the next section, we will touch on some of the partnerships inked by RSK in the regulations and compliance space that make the smart contract platform stand out among its competitors.

CoinFirm AMLT Oracle on RSK

A leading blockchain analytics and regulatory technology (RegTech) platform, Coinfirm recently announced it had integrated its industry-leading DeFi AMLT Oracle with both RSK and RIF.

The integration means that all transactions that get executed on the RSK protocol are fully covered with an autonomous risk assessment from Coinfirm’s C-score that is based on more than 270 red-flag algorithms. Furthermore, the use of blockchain oracles on the mainnet ensures the wider adoption of the RSK mainnet, specially among institutional clients that have been on the fence until now with regard to making their entry into the DeFi space.

Commenting on the development, Pawel Kuskowski, CEO and co-founder, CoinFirm, said:

“The RSK smart contract network has been able to make the digital gold of Bitcoin become a more impactful, viable currency. RIF’s DeFi stack aids the underbanked and with the support of Coinfirm’s DeFi AMLT Oracle, the network can counter malicious threats more efficiently and keep in compliance with regulators. The evolution of this partnership, how both firms are exploring the DeFi sphere, is a mirror image of the industry as a whole embracing decentralized finance.” 

Similar sentiments were echoed by Diego Gutierrez Zaldivar, CEO, and co-founder of RSK and IOV Labs.

“The integration of Coinfirm’s DeFi AMLT Oracle to the RSK platforms adds another important building block to the Open Financial Ecosystem on Bitcoin. Defi for Bitcoin has been gaining momentum and this integration will enable this market to flourish in a secure and compliant manner protecting individual investors, institutions and other participants in the market.”

For the uninitiated, CoinFirm unveiled its DeFi AML Oracle offering in 2020 which promises to be the world’s first regulatory technology solution geared toward bridging the distance between AML compliance and DeFi. Through this partnership, RSK will leverage CoinFirm’s AML solutions that will not only foster innovation in the DeFi space but also ensure that, at the same time, institutional-grade compliance is also maintained.

CipherTrace Integration with RSK

CipherTrace offers a wide swathe of solutions ranging from travel rule compliance, bank risk mitigation, AML, financial investigations, compliance monitoring, DeFi sanctions compliance, Bitcoin ATM compliance and hands-on training on all the mentioned solutions.

In August 2020, CipherTrace partnered with IOV Labs to add support for monitoring and tracing all transactions on RSK and RIF. The partnership added RSK and RIF to CipherTrace’s vast network of more than 800 supported cryptocurrencies/projects that it traces and keeps a close eye on for banks, financial institutions, exchanges, ATMs, OTC desks, hedge funds, custody solution providers and payment processors among many others.

CipherTrace’s integration with RSK means that all digital assets on the RSK blockchain are supported by the compliance solutions provider. At the time of the announcement, CipherTrace CEO Dave Jevans noted that the firm’s integration with RSK is a testimony to the project’s ability to readily support an increasing number of digital assets and blockchain networks. In a similar tone, IOV Labs CEO and co-founder Diego Gutierrez Zaldivar said that CipherTrace’s AML solution integration with RSK and RIF adds another important feature to RSK’s offerings to help it realize its mission to foster open finance at a large scale. Zaldivar added that CipherTrace’s integration, together with the low-cost payment processing, privacy-protecting data storage and reputation-based identity protocols provided by RIF, will enable the creation of cryptocurrency-based financial services that meet global financial safety regulations.

Conclusion

By now, you probably must have developed a fair idea about the role that regulations and compliance practices play in the maturity of an industry, regardless of its nature. The crypto and blockchain industry is a fairly novel one and, as such, requires all its stakeholders (including regulators, developers, builders, managers and the community) to work in unison to draft and implement conducive and healthy regulations that play the dual role of protecting investors’ interest while at the same time ensure that innovation is not killed in the name of “consumer protection”. Innovation cannot flourish when there is no room for autonomy or freedom or trial and error and that’s why an increasing number of regulators are slowly but steadily pivoting toward embracing emerging tech. 

In the same vein, RSK is doing its part to ensure the crypto industry does not fall prey to draconian regulations and compliance by implementing industry-leading AML and KYC solutions. RSK’s partnerships with CipherTrace and ConFirm is a testimony to the level of importance such regulatory measures hold in the RSK ecosystem. Protecting the investors’ funds and financial health is core to RSK’s vision.

As the macro crypto, DeFi and blockchain narratives continue to gather more strength, expect projects like RSK to lead the industry from the forefront and establish themselves as a force to reckon that promotes technological innovation to democratize the world of finance while also being compliant with regulations.