The Changing Crypto Landscape
The cryptocurrency landscape has experienced incredible growth in recent years, with the total market capitalization of crypto assets growing from around $2 billion to over $1 Trillion within a decade.
However, in spite of this exponential growth, the crypto space still faces significant challenges in terms of regulation and compliance. The lack of regulatory overview in the crypto market has left it open to manipulation, fraud, and other nefarious activities.
Without adequate protections and oversight, governments and financial institutions have been reluctant to get involved with cryptocurrencies, preventing the adoption of these digital assets by the mainstream population.
Particularly, since the contagious spread of bankruptcies in 2022 with FTX, Celsius, and other cryptocurrency lenders Chapter 11 Filings piling up, government and regulators have began clamping down on crypto exchanges and other related businesses.
The Current Dilemma: Do we Face Another Banking Crisis?
And while the crypto market has been under close scrutiny by regulators since last year, the traditional banking sector has come under the same microscope after the collapse of SVB bank and Credit Suisse debacle.
The rapid downfall of California-based Silicon Valley Bank has been the most severe US banking failure since 2008, with Credit Suisse also succumbing to the financial crisis and being sold at bargain prices. AMP’s chief economist Shane Oliver has noted that while these collapses are not indicative of a repeat of the 2008 financial crisis, they still possess the potential to spark contagion.
The market has responded to these developments by selling off bank stocks, particularly those of regional US banks, due to suspicions that their financial standings may be similar to SVB’s. US tech stocks, however, have fared well in recent weeks, suggesting that some investors are expecting the risk of a banking crisis to dissipate.
Nevertheless, the swiftness of such events has startled shareholders and clients. The speed of SVB’s decline – from disclosing a loss on its bond portfolio to its eventual collapse – taking only 48 hours, has been attributed to the instantaneous spread of news enabled by social media. Credit Suisse was granted an emergency loan from the Swiss central bank last week, leading to a period of relative stability, but by the weekend, it required rescue.
While central banks around the world have come together in an effort to avert the kind of credit crunch experienced during the financial crisis in 2008/2009, regulators are taking a closer look at the operations of financial institutions. This includes closer scrutiny of their internal risk management processes, as well as greater transparency in the disclosure of financial information to ensure that banks are able to effectively identify and manage potential risks.
The 2008/2009 Financial Crash Sparked the Creation of Bitcoin as a Decentralized Digital Currency.
In 2009, Satoshi Nakamoto created Bitcoin in response to the economic crisis that had been caused by the irresponsible lending practices of banks, and the bursting of housing bubbles across the world. Satoshi saw the necessity for an alternative financial system that focused on fairness and justice, giving power back to the people. His answer was a decentralised, peer-to-peer system that allowed individuals to transact without any central authority. To make this possible, he developed the Bitcoin Blockchain – a new payment infrastructure designed to tackle the financial issues brought on by the global economic downturn.
How AML and KYC Compliance Can Boost the Growth of the Cryptocurrency Industry
But the crypto market has seen its share of ups and downs since its inception, with a particularly volatile period taking place in 2018, characterized by a massive increase in Initial Coin Offerings (ICOs), which resulted in a subsequent market downturn. This downturn made the industry realize the need to take steps to increase trust and credibility, such as introducing Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures.
For decades, global AML and KYC legislation has been at the forefront of traditional financial regulation. The Bank Secrecy Act (BSA) of 1970 was the first of its kind, providing a framework for financial institutions to prevent money laundering and financing of terrorism.
In 1989, the global Financial Action Task Force (FATF) was established to further strengthen AML initiatives and ensure compliance with international standards. As the cryptocurrency industry continues to evolve, the same AML and KYC regulations that have been in place in traditional finance are being adopted into the crypto and niche sectors of the industry.
Regulatory compliance will most likely give the public more confidence in the market, increasing their willingness to invest and will make the crypto industry more secure and trustworthy, which is essential in encouraging more people to join the sector.
With the introduction of Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance standards and by working with the regulators, which includes implementing effective and investor-centric tools, could provide the necessary protections while also making the crypto market more attractive to individuals, governments and financial institutions.
Key Takes
In spite of the potential for misuse, Bitcoin has already established itself as a dependable and secure solution for many users. As the technology matures and more regulations are put in place, it is likely that the potential for fraud will be reduced.
The Bitcoin blockchain offers many advantages over traditional financial systems, including lower transaction fees and faster processing times. In addition, the distributed nature of the blockchain allows for a more secure and reliable system. Despite the potential for fraudulent activities, the technology is becoming more and more accepted by both individuals and institutions.
Eventually, the crypto market must embrace AML and KYC compliance standards in order to build trust and credibility in the industry. By taking the necessary steps to ensure compliant operations and investor protection, it will be able to attract more investors and grow in the long term.
As regulations are put in place and blockchain technology matures, the potential for misuse will be reduced, allowing the system to continue offering a dependable and secure solution to users around the world.
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