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Embracing Evolution: Crypto Compliance in Review and a Vision for 2024

Lana Schwartzman
Lana Schwartzman
January 4, 2024
Schwartzman boasts 19 years of experience in fintech and digital assets compliance, with a strong history of designing compliance programs and leading licensure strategies in crypto and financial companies.
Table of Contents
Summary

As we kick start the new year, we recognize that 2023 was undeniably a pivotal chapter in the ongoing narrative of crypto compliance. Last year, the space witnessed unprecedented transformations, surmounting challenges, and celebrated key milestones that underscore the industry's commitment to maturity, responsibility, and global cooperation. The challenges faced, lessons learned, and strides made in the pursuit of regulatory clarity have set the stage for a promising future. 

As Notabene's Head of Regulatory and Compliance, and with my background as a Crypto Compliance Officer, my excitement for what lies ahead is palpable. In this piece, I'll revisit some of the standout trends and milestones of 2023 and offer a glimpse into my predictions for the year ahead. 

Global Crypto Regulatory Developments in 2023

Regulatory Maturity and Global Alignment

2023 marked a turning point as regulatory bodies worldwide exhibited a growing understanding of the crypto landscape. Major jurisdictions refined existing frameworks and introduced comprehensive regulations, paving the way for a more mature and structured industry that will continue to support various use cases.

Global regulatory progress in 2023: key regional developments

Commitment in Key Regions: The United Kingdom, Hong Kong, United Arab Emirates, India, Japan, and the EU demonstrated a commitment to fostering a secure and transparent crypto ecosystem.

  • Hong Kong: The Securities and Futures Commission (SFC) implemented a regulatory framework for crypto exchanges, where licensed virtual asset portfolio managers are subject to the same regulatory standards as traditional securities firms.
  • The UAE: The Dubai Multi Commodities Centre (DMCC) introduced a comprehensive regulatory framework for businesses engaged in crypto-related activities.
  • India: Showed an increased interest in blockchain and digital assets; explored the possibilities of a central bank digital currency (CBDC) and developed crypto regulations.
  • Japan: Introduced a licensing system for cryptocurrency exchanges overseen by the Financial Services Agency (FSA).

Notabene's Industry Impact: Showcased dedication to building a regulatory framework to address anti-money laundering (AML) concerns and facilitating secure cross-border transactions, with a significant increase in transaction volume in the Notabene system.

Travel Rule Implementation Gained Traction

2023 marked a significant leap forward in Travel Rule implementation. Inspired by FATF guidelines, jurisdictions worldwide have made substantial progress enforcing this essential measure. According to a recent report by Price Waterhouse Cooper, 42 countries have engaged in discussions or enacted cryptocurrency regulations and laws in 2023. These efforts primarily concentrate on four central areas: regulating stablecoins, ensuring compliance with the travel rule, providing clear guidelines for licensing and listings, and developing comprehensive frameworks for cryptocurrency.

Global emphasis on Travel Rule

Across the globe, regulators highlighted the importance of Travel Rule. 

  • The UAE: VARA and ADGM emphasize the need for policies and steps related to the Travel Rule for provisional licenses. 
  • Hong Kong: the Securities and Futures Commission (SFC) adopted a descriptive approach, outlining specific due diligence requirements for Virtual Asset Service Providers (VASPs). 
  • Japan: the amendment to the Act on Prevention of Transfer of Criminal Proceeds (APTCP) amendment established more straightforward Travel Rule obligations for VASPs, contributing to a more defined regulatory landscape.  
  • The EU’s revised Travel Rule Framework (TFR) introduced Travel Rule requirements for Crypto Asset Service Providers (CASPs), ensuring harmonization across all 27 member states.

2023 Travel Rule enforcement dates

  • February 7, 2023 —  Dubai
  • June 1, 2023 — Hong Kong
  • June 1, 2023 —  Japan
  • September 1, 2023 — United Kingdom

Heightened transparency and cross-border collaboration

These moves have not only heightened transparency but have also laid the groundwork for effective cross-border collaboration. As the latest addition to crypto AML regulations, Travel Rule compliance uniquely offers VASPs transaction-level insights into counterparties, and sanctions. This insight enables VASPs to detect whether clients send transactions to sanctioned entities, wallets, or jurisdictions. Properly implemented, Travel Rule compliance empowers VASPs to halt potential illicit transactions before they are recorded on the blockchain, thereby reducing overall risk exposure and avoiding operational challenges.

Interoperability Challenges Were Addressed

The industry has made significant progress in addressing the interoperability challenges obstructing seamless collaboration between disparate networks and closed systems. Standardization and collaborative initiatives bridged the gaps, fostering a more interconnected and compliant ecosystem.

Key developments in interoperability:

  • IVMS102 Updates: The industry's efforts in updating the IVMS102 standard have been noteworthy. IVMS102 is crucial in standardizing messaging formats across different systems, facilitating smoother information exchange, and reducing complexities in multi-system interactions. This standard is critical in ensuring that different platforms can effectively communicate and transact with one another.
  • TRP and TRISA Collaboration: The integration of TRP, a decentralized peer-to-peer Travel Rule protocol, with TRISA, is a significant stride forward. VASPs using TRP can effortlessly exchange compliant data with those using TRISA. This marks a monumental step in global compliance and security enhancement.
  • Notabene's SafeGateway Solution: Notabene introduced SafeGateway, a noteworthy innovation enhancing Travel Rule compliance. It facilitates seamless interactions between VASPs across various protocols, enabling a unified compliance strategy and efficient access to counterparties, thus simplifying regulatory adherence. This development has been a focal point in Notabene's contributions to the FATF’s Virtual Asset Contact Group discussions.

Technological Advancements in Compliance Tools

Did someone say AI?

The rapid evolution of compliance technologies has been a standout feature of the year. Companies have harnessed blockchain analytics, artificial intelligence, and machine learning to develop sophisticated tools. These tools are used for monitoring, reporting, and ensuring adherence to regulatory requirements and transparency for crypto compliance, as demonstrated by the cross-chain investigation tools that blockchain analytics companies can offer.

2024 Projections for Crypto Regulation: Key Trends to Watch

So, what’s on my crystal ball for 2024 projections? Here are a few themes. 

Heightened Scrutiny on Source of Funds Controls

Recent geopolitical events, particularly the Russia-Ukraine conflict, have intensified the focus on sanctions compliance in cryptocurrency transactions. This shift has led to increased regulatory pressure on Virtual Asset Service Providers (VASPs) to monitor the sources of funds more rigorously. Compliance with the Travel Rule plays a pivotal role here, as it empowers Beneficiary VASPs with clear records of fund sources, aiding in mitigating sanctions risks.

  • UK Regulations: In the UK, beneficiary VASPs must return funds to the originator if there are discrepancies or missing Travel Rule information, ensuring tighter control and transparency.
  • UAE Guidelines: The UAE's Virtual Assets Regulatory Authority requires Beneficiary VASPs to collect and retain detailed information about the originator and beneficiary for transactions exceeding AED 3,500.
  • Hong Kong's Approach: A similar emphasis on the verification of fund sources is also observed in Hong Kong.

However, the success of Travel Rule compliance, particularly in deposits, largely hinges on the cooperation of Originator VASPs. Challenges such as the Sunrise Issue and limitations in protocol interoperability present obstacles to effective collaboration and compliance.


Amplified Focus on Custody of Customer Funds

In response to recent fund misappropriation and mismanagement incidents, regulators worldwide are moving towards stricter rules for the custody of customer funds. This shift is particularly evident in the growing requirement for a clear separation between exchange services and the custody of funds, emphasizing the importance of safeguarding investor assets.

Examples of funds segregation regulations:

These examples indicate a global trend towards more robust and transparent practices in the custody of customer funds within the crypto industry, reflecting a move towards increased protection for investors and stakeholders.

Intensified Emphasis on Stablecoin Regulation

Stablecoin regulatory action will continue to increase in 2024. In 2023, various countries and financial bodies were actively working on regulatory frameworks to address stablecoin issuance and usage within their jurisdictions. These regulations may require stablecoin issuers to adhere to specific reserve and reporting requirements. 

In 2023, several countries and organizations advanced their stablecoin regulations:

Widespread Adoption of the Travel Rule

In 2024, we expect a significant surge in the global adoption of the Travel Rule. As more jurisdictions recognize its importance, we anticipate a large comprehensive network of compliant VASPs that will begin seamlessly exchanging information, fostering a safer and more transparent crypto environment. 

Key movements to mobilize compliance in 2024 include the EU's Transfer of Funds regulation, which will unify Travel Rule across EU nations, and LATAM's alignment efforts, highlighted by the Central Bank of Brazil's recent crypto consultations.

Emergence of Unified Global Regulatory Frameworks

The upcoming year is set to witness the evolution of the groundwork laid in 2023 into more extensive, globally aligned regulatory frameworks and the development of more structured and transparent regulatory approaches. This development is expected to streamline cross-border regulatory processes, simplify compliance for crypto businesses, and create a more equitable playing field.

EU's regulatory advances

The EU has made significant strides with the introduction of the Regulation on Markets in Crypto-Assets (MiCA) and the revised Transfer of Funds Regulation (TFR). MiCA establishes a comprehensive framework for diverse crypto assets and service providers, aiming to balance investor protection, financial stability, and innovation. The revised TFR uniformly applies Travel Rule requirements across all EU member states, replacing the previously varied national approaches with a consistent compliance timeline.

UK's holistic approach

In a similar vein, the UK has embraced a comprehensive approach to crypto regulation. In 2023, HM Treasury issued significant updates on several regulatory fronts:

The UK's early and successful implementation of Travel Rule requirements, preceding the EU, highlights a growing trend towards transactional transparency. This development is leading to an increasing market preference for compliant transaction flows in the crypto sector.

These advancements in the EU and UK point to a trend towards more organized and transparent regulatory environments in the crypto industry, with a focus on protecting investors and encouraging innovation.

Blurring Boundaries: Crypto Will Meet Traditional Finance 

The integration between the crypto industry and traditional financial sectors is projected to deepen further. 2024 is poised to be a year where we see heightened collaborative efforts leading to innovative financial products that bridge the gap between conventional and decentralized systems. This will be exciting! 

Enhanced Privacy Measures

As the crypto industry continues to mature, a concerted focus on balancing regulatory compliance with user privacy is expected. We anticipate the  emergence of new privacy-centric technologies and protocols, offering enhanced confidentiality while maintaining adherence to regulatory standards.

Crypto and Compliance Education: A Continuing Focus

Education and awareness programs will remain at the forefront of industry initiatives. As more users join the crypto space, understanding the importance of compliance and responsible practices will become paramount. Expect to see a surge in educational initiatives aimed at users, businesses, and regulators alike. Watch this space.

As we venture into 2024, the industry's commitment to responsible innovation, regulatory adherence, and collaborative growth will shape a future where digital assets seamlessly coexist with traditional finance, offering a dynamic and secure landscape for all stakeholders.

Here's to a year of continued evolution, progress, and positive disruption in the ever-evolving world of crypto compliance.

P.S. When Lambo??

Lana Schwartzman

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