Picture: 123RF/KONSTANTIN SHAKLEIN
Picture: 123RF/KONSTANTIN SHAKLEIN

Ever since the bitcoin network first came online in January 2009, its use has often been associated with grey market activities. Before mainstream adoption, the dark web, a shady online marketplace where anonymous users can buy or sell anything from illegal guns and stolen contraband to narcotics and malware, was a prime hub for early bitcoin activity.

While dark web activity remains a source of frustration in the cryptocurrency sector, industry stakeholders are quick to point out that the share of bitcoin-related transactions on the dark web has plummeted since international law enforcement operations in 2013 and 2017 shut down Silk Road and AlphaBay, two of the biggest dark web markets accepting cryptocurrency.

In the years after the demise of AlphaBay, the blockchain industry has emerged from the shadows and proven itself to be a refined and mainstream sector of the economy. While the bitcoin network still supports the privacy of law-abiding citizens, users who purchase services or goods on the network must now meet certain identification thresholds.

As the industry becomes more attuned to global regulatory standards, cryptocurrency exchanges and transaction platforms have started enforcing stricter know your customer (KYC) processes. As KYC protocols become more advanced, cryptocurrencies are well positioned to benefit from the inevitable upturn in regulatory compliance, customer transparency and business scalability.

While privacy obsessives and bitcoin maximalists may oppose the cryptocurrency industry’s growing compliance with KYC requirements, the average digital currency owner actually stands to gain from bitcoin becoming a more accessible asset and more flexible household currency.

Shored up by the creation and integration of responsible and consistent regulatory controls, bitcoin is slowly but surely becoming a safe-haven asset, illustrating the currency’s remarkable transformation from an off-the-grid oddity to an essential component of both Wall Street and Main Street.

Now, even as traditional equity markets ping-pong between recovery and volatility, bitcoin has just notched a 2020 high at $15,950. If this bullish pattern continues, analysts expect the bitcoin price to continue rallying past $17,000.

As cryptocurrency companies and markets continue to mature, institutional investors have signalled their willingness to look beyond the industry’s seedy past, alleviating the stigma of criminality and propelling digital currency companies to the cutting edge of the fintech sector.

At the frontier of this fintech development are companies addressing bitcoin adoption and accessibility issues. For example, CoinFlip, the world’s largest bitcoin ATM operator, is helping bridge the gap between crypto-markets and new users. Its ATMs accept cash in exchange for cryptocurrency — a far more convenient and safer solution than peer-to-peer swaps or online exchanges.

Companies such as CoinFlip have re-orientated their business strategies to better catalyse trust and co-operation between the triad of cryptocurrency industry, public legislators and government regulators

Like most companies in the digital currency space, CoinFlip recognises that transparent oversight and coherent regulation will accelerate, not delay, mainstream adoption and innovation in the cryptocurrency sector.

In service to this vision, companies such as CoinFlip have reorientated their business strategies to better catalyse trust and co-operation between the triad of cryptocurrency industry, public legislators and government regulators. To shed the stigma of the dark web, large operators such as CoinFlip have made it their business to ensure full compliance with the US treasury department’s financial crimes enforcement network (FinCEN).

In an interview with Crowdfund Insider, CoinFlip CEO Daniel Polotsky emphasised that his company has a strong relationship with vendors and financial institutions and “has always been a compliance-focused company”. CoinFlip receives “letters of no action before entering a new state and [requires] KYC/anti-money laundering (AML) for all [its] customers.”

Unsurprisingly, the uptick in regulatory enforcement across the cryptocurrency industry has not been without some bumps in the road. Fortunately, the majority of these hiccups can be traced back to a handful of misguided federal regulations. These regulations tend to classify cryptocurrency companies the same way they classify traditional banks, leading to stifling customer identification conditions, stringent financing controls and tough licensing obligations.

New York’s slow launch of BitLicense in 2015 is a good example of how strains of stringent regulation can drive away market-leading cryptocurrency companies. In this case, the introduction of BitLicense, a digital currency business licensing regulation with a laundry list of controversial conditions, drove 15 major cryptocurrency companies to cease operations in New York. Among these companies were Bitfinex, BitMEX and Kraken, three of the world’s largest cryptocurrency exchanges.

In spite of these clumsy federal regulations, the cryptocurrency industry remains a vibrant source of fintech innovation. For the most part, US crypto-companies are leading the charge against over-regulation and red tape. Spurred on by spiking industry interest and surging customer demand in underbanked communities, CoinFlip and other bitcoin ATM operators have already installed thousands of cryptocurrency kiosks across the US.

Nevertheless, while there’s no doubt that changing industry attitudes towards KYC and FinCEN compliance are a significant step forward, the fact remains that lingering privacy issues and the stigma of illicit activity have continued to hold up the rollout of new, industry-specific regulations and targeted legislation in both the US and Europe.

If regulators want to safeguard and incentivise innovation in the digital currency industry, they must be capable of making a distinction between crypto-banking and crypto-fintech companies. While there will undoubtedly be cases in which specific banking regulations are more appropriate, if current trends persist, the future of cryptocurrency will be an industry built atop sophisticated fintech platforms and nimble decentralised finance companies.

• Wilson is CEO and founder of Roger and Stone Associates, a London-based financial consultancy firm specialising in anti-money laundering, fraud, forensics and country assessments.

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