The risks associated with the crypto exchange market are numerous and varied. The primary concern is the level of leverage, which can exceed 125 times the initial investment. As a result, many jurisdictions have taken action to combat these risks.
Regulators should ensure that crypto exchanges adhere to existing international standards for securities intermediaries. These standards should be implemented in all jurisdictions. In addition, governments should focus on making cross-border payments faster, cheaper, and more transparent. The IMF is one institution that could help with these efforts. One issue with crypto exchanges is their lack of transparency. Since they are more like a financial institution than a traditional bank, compliance professionals are less likely to be fully aware of potential fraud and financial crimes. Furthermore, many crypto operators have little incentive to monitor AML and report fraud. Profit-based motivations often overshadow compliance.
AML/KYC regulations for crypto transactions
With the increasing volatility of the cryptocurrency market, regulators have shown a willingness to implement more stringent AML/KYC regulations for companies that deal in crypto assets. These regulations protect financial institutions from potential money laundering and cybercrime. While implementing AML/KYC regulations is only sometimes straightforward, companies dealing in crypto assets should prepare themselves for more extensive compliance obligations. KYC, or “Know Your Customer,” refers to the initial customer due diligence step in an AML process. This is when financial institutions onboard new customers and conduct thorough verification to verify the identities of these individuals. In doing so, the financial institution can assign them a risk value based on their likelihood of committing the financial crime. While many cryptocurrency exchanges and wallets already employ KYC procedures, some have slowly adopted them. The New York State Department of Financial Services (DFS) is among the leading crypto regulators. The BitLicense regulation was passed in 2015 and requires cryptocurrency exchanges to apply for a DFS license and implement robust AML/KYC programs. In early 2022, the DFS announced a settlement that uses cryptocurrency to facilitate payments. Although no enforcement actions have yet been announced against OKX exchange, the exchange revealed that the DFS was investigating it.
Protections of cryptocurrencies in countries with troubled central banks
The potential for cryptocurrencies to disrupt the traditional financial system has spurred discussions about the need for effective policy measures. But it is also essential to consider the risks of cryptos, including market manipulation, systemic risk, lending and payment risks, and potential consumer harm. These issues require an international approach. Currently, many countries lack adequate protections for cryptocurrencies. These countries are at risk of losing control over crypto assets. Moreover, centralized exchanges do not provide a secure environment, and users are subject to various forms of identity verification. This poses an enormous risk to the stability of the financial system. The risks of cryptocurrencies are significant for investors, consumers, and businesses, requiring effective regulation. Cryptocurrencies are highly volatile. In November of last year, their market cap was approximately $3 trillion. Despite this growth, cryptocurrencies are still a technological frontier. While their benefits are clear, they also pose real risks.Â
