A guide to crypto exchange compliance

In 2019, compliance underwent a radical change that will continue evolving for years to come. The increasing demands of international laws to fight money laundering and terrorist financing are significant, and professionals in governance are feeling the impact.

With respect to crypto exchange compliance, many operators are not sure where they stand. Regulations change and can be confusing, leaving many unsure of how to proceed. In this article, we will discuss the importance of compliance for crypto exchanges, and how Fast Offshore can help.

Why do so many overlook crypto exchange compliance obligations?

Approximately, two-thirds of crypto exchanges fail to properly enforce their compliance obligations. This can be due to a number of reasons; some nefarious, others not.

The cryptocurrency market is thriving and competition between exchanges can lead to them dismissing their regulatory obligations. Clients often find KYC cumbersome and inconvenient so will look for a less bureaucratic alternative. This means some exchanges stop including them in their operations. It can take hours for crypto exchanges to carry out KYC and this increases customer drop-out rate, especially in a market where time is money.

Other exchanges choose to forgo KYC because it costs them money. Conducting proper checks takes time and money and some don’t see it as an essential step in their operations. 

There are also some who are just not clear on their obligations. Some jurisdictions do not have legislation governing virtual assets, others have vague and general rules. This leads to confusion and a drop in compliance levels.

What are the risks of failing to comply?

There are a number of risks when an exchange fails to comply with compliance regulations. Claiming ignorance will not work with regulators and operators could find themselves shut down, fined, or facing prison time. If you get caught you can be blacklisted from applying for licenses, bank accounts, and various other things in the future.

In addition to this, your reputation will be destroyed. One bad move, one bit of bad publicity and your name will be dragged through every crypto forum on the internet. Once your name has been soiled, it is almost impossible to emerge unscathed. 

What are the benefits of compliance?

When weighing up the time and cost of compliance against the risks of failing to comply, it is clear that abiding by the law wins every time.

If you are compliant with every aspect of your exchanges operations, you can rest assured you will not end up in court, prison, or having your business closed. You can also work on building your reputation for transparency, ethics and good governance. You will have service providers and affiliates wanting to work with you and will have no issue acquiring licenses. Furthermore, the word that you are a reputable company will get around and you will become popular with serious cryptocurrency users. 

In both the long term and the short come, compliance both internally and externally protects you and your clients.

How can a cryptocurrency exchange be compliant?

This depends a lot on where your cryptocurrency exchange is located. If you are situated in Malta, you must adhere to their laws, plus EU AML/CFT legislation. If you are operating in an unregulated jurisdiction, we would still recommend that you comply with international best practices. 

Firstly, you need to comply with KYC, AML, and CFT guidelines when onboarding each client. You need to ensure your customer proves who they are, where they are from, and where they live. Information such as name, phone number, email, physical address and a utility bill are usual in most jurisdictions. Once they are onboarded, you are required to observe transactions continually to make sure that nothing suspicious or unusual is occurring.

Exchanges should have a robust customer acceptance policy that details what kinds of customers will be accepted or refused. It needs to confirm their identity and then monitor all transactions to ensure proper risk management. We also advise ongoing review and upgrades to compliance policies. You should conduct compliance audits and reviews on a periodic basis to be sure that your standards are high enough. These are just some of the steps needed to be compliant.

Fast Offshore and crypto exchange compliance

It can be difficult to keep up with changing laws and requirements, especially in a developing market. Each country you operate in and even the customers you serve can impact the compliance you need to ensure. But as mentioned above, compliance can be costly and time-consuming, not to mention confusing. That is where we come in.

We believe in compliance, ethics, and transparency and we pride ourselves on helping our clients achieve this. Our compliance services help you to meet local and international regulatory standards through customised support tailored to you. By determining the best approach to compliance regimes, we are able to guide you towards ensuring full compliance with your crypto exchange.

To find out more or to ask us a question, contact us today.