Common Compliance Challenges of Cryptocurrency And Ways to Overcome Those Challenges

Cryptocurrencies over the years have grown tremendously in the world. The impact of cryptos on banks, financial institutions, business enterprises, and individuals has been revolutionary. This is because cryptos offer many unique opportunities and have the potential to break free from the shackles of financial monopoly and deliver financial freedom. In this regard, many crypto exchange platforms are offering the best crypto services to the masses. However, there are some compliance challenges, which every user and institution should be aware of while dealing with cryptos. Fortunately, most of these challenges are resolvable.

Regulatory Compliance Challenges Involving Cryptocurrencies

Cryptocurrencies around the world face several challenges and therefore it is necessary to identify them for better awareness.

Degree of Anonymity

Cryptocurrency transactions are known for their pseudonymity and anonymity. Therefore, it is difficult to keep track of the source and origin of the funds. KYC procedures in banking and that of cryptocurrencies may indeed have similarities. However, the KYC procedures associated with cryptocurrencies, unlike those of banking, do not have uniformity. Therefore, this poses a major challenge for countries and users while dealing with cryptos. 

Lack of Regulatory Guidelines

Governments around the world lack clear guidelines on digital assets and cryptocurrencies. This is because the economic realities of each country are different. The problem becomes more complicated as many governments have different attitudes towards cryptocurrencies. Some are openly hostile, some are ambiguous, while some like the El Salvadoran government have granted official recognition. Therefore, there is no consensus on framing regulatory guidelines. Consequently, this can increase the possibility of criminal misuse such as terrorist financing and money laundering.

Financial Crimes

The compliance challenges can increase financial crimes such as tax evasion, money laundering, etc. If left unchecked, non-compliance can result in corruption, illicit political funding, terrorism financing, and even human trafficking. 

Overcoming Compliance Challenges Through Strategies

There are effective strategies to minimize the risk of compliance challenges. Some strategies can altogether eliminate the challenges.

Mainstream Use of Blockchain Technology

Blockchain technology can reduce the challenges of compliance significantly. This is because it has a transparent, credible, and distributed ledger technology. The features of the technology if properly applied can identify suspicious activities and pinpoint patterns of money laundering. Furthermore, smart contract features can make KYC and AML compliance systems more robust. Therefore, both the risks of hacking and fraud can  reduce considerably.

Risk Management Framework

The challenges of cryptocurrency violations can be comprehensively dealt with by creating a suitable risk management framework. The framework should easily give banks and other authorities both investigative and evaluative powers. The source of funds, transaction of purpose, and potential for money laundering must be easily decipherable for authorities. Similarly, the risk management framework should have a behavior-based monitoring system. Whenever there is a sudden increase in the transaction volume in anonymous locations, then red flags should be raised. 

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Conclusion

The growing popularity of cryptocurrencies indicates worldwide acceptance of a decentralized financial system. Although there are common challenges involving cryptos, most are solvable by using effective strategies. The positive news, the hostile attitude of some regimes has changed considerably and many governments want regulations to be standardized. Consequently, these may significantly reduce the risks and challenges and make cryptos more mainstream than ever before.