In the constantly evolving financial industry, compliance has emerged as a vital aspect of operating industry infrastructure worldwide. Even in the crypto world, achieving compliance remains a significant milestone.
According to a recent report from Ripple, the finance industry spends an estimated $181 billion annually on financial crime compliance, underscoring its importance for the global economy.
Taking this further, 2022, after the series of mishaps that occurred in the crypto industry notably the collapse of FTX, TerraLUNA, Celsius and the several hacks, it has become more evident than ever that clear and consistent compliance requirements are needed.
The numerous rules and regulations that crypto companies must follow, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) measures, disaster recovery protocols, sanctions, privacy regulations, and vendor risk management, present a substantial challenge.
All these challenges raise a fundamental question: “How can companies entering the crypto space effectively navigate this ever-evolving compliance landscape?”
Barriers and challenges
The major challenge to global compliance mentioned by Ripple is that the global compliance landscape is currently fragmented and segmented, with varying processes, timelines, and licensing requirements across jurisdictions.
Looking at the industry globally, some nations are yet to fully accept the use of crypto, as it is banned. Others have either accepted them or cautioned their clients, while another group is neutral.
According to Ripple, regulatory compliance is a top challenge for 66% of payments executives at leading corporations and financial institutions worldwide.
Additionally, it’s worth noting that over 50% of global payments executives at corporations and financial institutions find financial crime compliance to very challenging, with 16% considering it extremely challenging.
Furthermore, the DeFi (Decentralized Finance) market, which is a significant player in the crypto industry, remains largely unregulated or subject to uncertainty.
Positive developments and global trends
Positively, Ripple disclosed that amid the challenges of 2022, there were notable advancements. Companies that help with on-chain regulations and analysis got more attention and received a lot of investment.
Several countries, including Brazil, Morocco, India, Germany, Australia, and the UK, are making strides toward favourable crypto regulations. These developments indicate a promising future for compliance professionals, as global trends favour clearer and more accommodating crypto regulations.
Following the firm’s report on the crypto industry in the last twelve months, it added that while most enterprise respondents intend to leverage crypto technology to facilitate cryptocurrency payments, many companies will be required to navigate diverse compliance regulations across different jurisdictions.
Blockchain for enforcement of compliance
Therefore, the growing adoption of crypto will inevitably necessitate clearer guidance and a streamlined compliance process. Also, blockchain technology holds the potential to alleviate compliance challenges in the financial system.
Through the pre-programming of compliance rules, including KYC, AML, transaction monitoring (both on-chain and off-chain), and sanctions screening, blockchain can reduce the risk of errors, enhance cost-effectiveness, and simplify the management of complex compliance requirements.
This, in turn, can empower more financial institutions to offer on-chain DeFi solutions to their customers.