Navigating the new era of crypto compliance and maturation in 2024

Last week was a big week for the “crypto” industry. The SEC approved 11 spot bitcoin ETFs, allowing them to legally trade in the US on January 10; however, it was not without controversy, as the day before the official announcement, a fake announcement was posted on SEC’s X account that was later attributed to a hack – a dramatic start indeed.

For better or worse, the regulators are now here, and Wall Street-wrapped crypto ETFs saw record-breaking Day 1 trades of more than $4.6 billion. So what happens next? On the one hand, JPMorgan’s recently released forecast expects $36B of other crypto investments to move into the ETFs, while on the other hand, many firms are denying access to their clients to invest in these products.

In 2022, “crypto winter” arrived with a blizzard of fraud, overreliance on bad debts and bankruptcies. These painful events led to two things that are now keenly felt about crypto – the maturing of the industry and regulatory backlash. First, projects are more prudent. The lateral market for crypto-legal and compliance remains active. Gray hair is often no longer seen as an entirely bad thing, especially in relation to institutional involvement.

Second, there has already been a natural increase in regulatory scrutiny in line with the growth of the industry. Much was made of the SEC’s announcement of the award of 20 additional positions in the newly renamed Crypto Assets and Cyber ​​​​Unit (formerly the Cyber ​​​​Unit) in May 2022, shortly before the collapse of Terra/Luna, but it was the commission’s way of addressing it. the explosion of crypto markets. Now, in response to the active enforcement environment and overall scrutiny levied against any activity or entity involved with digital assets, projects are looking to either “go offshore” in an attempt to immunize themselves from US regulatory pressure, or to to double compliance and best. practices on land.

2023 was a year of both challenge and stabilization in crypto. Traditional financial services entities (“tradfi”) scaled back their involvement with crypto and DeFi, exploratory partnerships never materialized, lawmakers cheered and angered the industry, and more entities and individuals sought safe, trusted choices in crypto. Now, with the recent BTC ETF approval bringing more institutional and lower-risk investors into at least tangential involvement in crypto, what will the 2024 US regulatory environment bring about, and how will it affect investment and involvement in crypto?

Regulators have indicated that they will continue to focus on anti-money laundering, DeFi, financial intermediaries and conflicts of interest. To potentially avoid enforcement, regulated entities in crypto will need to have the best transparency and compliance, and unregulated entities in crypto must either have a clear justification for the lack of regulation or have no ties whatsoever to the US – or, at the very least no engagement or marketing to prospective US customers and corrective action to block such activity.

2024 holds great promise for the growth of institutional and trading involvement with crypto, and the regulatory scrutiny will force projects to take a hard look at their risk, compliance and legal infrastructure. Check out the following crypto tradfi growth areas and their regulatory risks:

Crypto custody – an ongoing area of ​​investment for foreign banks in response to client demand, this is an underserved area in the US, mainly due to regulatory concerns. As technology advances, more promising solutions for safety and security emerge – but those solutions must pass regulatory and ultimately legislative muster.

Tokenization – The research and development in this area of ​​both crypto and tradfi exploded in 2023. Regulators have seemingly been more welcoming to tokenization than blockchain or fintech as opposed to crypto, and banks have increasingly led the charge in this arena. So it will probably still be scrutinized because of the big names involved, but it should also gain legitimacy because of the big names involved.

Anti-Money Laundering – This is an existential risk area for crypto (unregulated or regulated), so parties must continue to focus on dealing with entities with best practices in rigorous know-your-customer processes and sanctions screening. Look to more sophisticated advances in technology, such as the use of zero-knowledge proofs and on-chain identity verification, to help facilitate. Regulators will continue to demand accountability on this front, even from “decentralized” entities.

This year promises a continued flurry of activity from US regulators. The best thing that can happen is continued and ever-growing engagement between the industry, regulators and legislators, all working to improve and build on the status quo.

What are the main regulatory hurdles for businesses entering the crypto market in 2024?

The impact of regulatory changes on crypto businesses is significant, but varies depending on the nature of the business. Key regulatory challenges this year will include complying with evolving global AML standards and understanding the nuanced differences in crypto-asset classifications across regions. For example, a digital token may be considered a commodity in one jurisdiction but a security in another, necessitating a diverse approach to compliance. Businesses must invest in robust compliance frameworks that are both flexible and responsive to these various regulations, including financial crime prevention, asset classification and market integrity. There will be a range of approaches to regulatory implementation in these areas.

How can businesses effectively navigate the diverse international crypto regulations?

Effectively navigating international crypto regulations requires a strategy that combines global compliance principles while adapting to local regulatory requirements. TradFi institutions have been operating in a global landscape with fragmented regulation for years. In contrast, crypto firms must mature in a fraction of the time to continue operating in the borderless environment in which they live. This involves continuous monitoring of regulatory trends in key markets, deploying a skilled compliance team and leveraging technology to streamline compliance processes. Success in this area often depends on how well a business can integrate these compliance strategies into its broader operating framework, enabling agility to respond to regulatory changes while maintaining a firm understanding of the global regulatory landscape.

Morgan Stanley is concerned that central bank digital currencies (CBDCs) along with bitcoin have the potential to reduce the US dollar’s dominance.

BlackRock CEO Larry Fink’s interview covers his thoughts on the ETF approvals, Ether ETFs and the path to tokenization.