So far, regulation and cryptocurrency have not made good bedfellows.
There’s a very strong argument within much of the community that KYC has no place in Bitcoin. Moreover, many start-ups are often forced out of business due to the excessive demands of regulators who fail to understand the technology they’re trying to control.
However, if the goal of Bitcoin is to get people to use it, most people grudgingly concede that it has to be subject to regulatory scrutiny.
But can existing bank regulation really be enforced on cryptocurrency start-ups? Will it clip their wings before they can actually get off the ground?
Guidepost Solutions CEO and legal professional Julie Myers Wood gives her take on how regulation should evolve in the space.
Regulation and cryptocurrency with Julie Myers Wood
I ask Julie about the belief that regulation and cryptocurrency go together like oil and water.
She replies, “Money laundering, fraud, and the financing of terrorism are serious crimes that have significant global effects. Any technology that has the capability to be used for these crimes must be regulated in some way to mitigate those risks.”
As a lawyer by training who spent the bulk of her career in the United States federal government, it’s not really surprising that she’s an advocate for tighter regulation in the space.
Julie also spent many years focusing on preventing money laundering and illicit activity in the banking system.
“After leaving the government, I started my own firm which developed compliance software. Guidepost Solutions acquired my firm in 2012 and I have been there ever since,” she says.
“My interest in blockchain technology and cryptocurrencies comes from my overall interest in technology’s ability to solve problems and transform systems. At the same time, given my background, a core part of my interest is ensuring that these tools and use of technology do not empower bad actors.”
Existing bank regulation must be adapted for cryptocurrencies
That said, she believes that there are “a lot of ways to regulate emerging technologies while still enjoying the advantages of the new technology”.
So how about the upcoming FATF regulation that will likely cripple many new start-ups (especially cryptocurrency exchanges) in the space? What does she think about that?
“Regulators are comfortable with the types of regulations that are in place for traditional financial institutions. There are frameworks, terminology, and structures that have been established for a long time,” she concedes.
“It seems reasonable that the FATF (and probably eventually other similar bodies or government authorities) will turn to something familiar as a way to make sense of a new or emerging technology.”
However, Julie maintains that new technologies should be regulated fairly and with a fresh approach.
“It is important that regulators recognise that the system built for banks cannot be superimposed onto cryptocurrency start-ups and work on what is reasonable and meaningful in the start-up space.”
To that end, she maintains that the US is taking a “wise” approach by carefully monitoring developments in the crypto space and “not regulating too quickly”.
While many have criticised the US for lagging behind, she believes that regulators want to better understand the technology before enforcing laws.
Does that mean the world super-power will get left behind in the blockchain race and be outpaced by countries like China? Not in her opinion.
“I do not think that the US is going to be left behind in this area. There is space for a lot of players in this area.”
How cryptocurrency start-ups can fulfil their obligations
In an article for Forbes earlier this year, Julie talked about the importance of cryptocurrency companies preparing for compliance. She argued that hiring a compliance officer was an absolute must even though it will likely be costly for many exchanges.
She explains, “It’s true that hiring a compliance officer can be a significant expense for small businesses, including start-ups, but the cost of not meeting these compliance obligations is even more expensive. Someone in the organisation needs to take ownership of compliance matters.
“With increased regulatory focus in this area, you can’t afford not to meet these obligations.”
The most difficult part about the upcoming legislation is what’s called the “Travel Rule” issued by FinCEN in the mid-90s. It states that for all transactions over $1,000, cryptocurrency businesses must be able to record and share sensitive information with other financial institutions if necessary.
Isn’t tracking every single transaction from $1,000 a little excessive? Why would the FATF set the limit so low for regulation and cryptocurrency?
Julie says, “Even though we think of this as an insignificant amount today, a lower threshold guarantees that more transactions will be subject to the rule, and therefore more information will be known and more transparency will be present.”
What’s it like being a woman in a male-dominated space?
“I personally have not encountered any negativity based on my gender for working in the emerging tech space. I have encountered some scepticism about cryptocurrencies generally, but I enjoy working to dispel the rumours and show how compliant cryptocurrencies can be and the importance of addressing risks in this world.”
Whatever cryptocurrency businesses decide, they have to realise they’re no longer working in a bubble. As more people become aware of cryptocurrencies and governments look at issuing their own digital coins, one thing is true.
As Julie warns, a “new world of crypto compliance” is coming, and businesses had better get prepared.