The Crypto industry has undergone a major shift in regulatory compliance since the beginning, according to James Smith, co-founder of Elliptic, a crypto compliance company founded in 2013.
“In the early days, only a few companies were approaching compliance in serious ways,” Smith told Cointelegraph at the Token2049 event. “Coinbase was our first customer. They wanted to build their business that way from the start, but for most others, that wasn't a major priority.”
It began to change as regulators, including New York state regulators, are more active in the crypto industry. The involvement of traditional financial institutions like Fidelity and DBS Bank also contributed as they entered the space with established compliance expectations from traditional financial services.
For example, Fidelity provided its first cryptographic service to its clients in 2019, while the Asian giant DB created a digital exchange for accredited and institutional investors in 2020.
“We've seen significant changes over the last few years. Exchanges on the global map now are interested in compliance because we want to be part of the global ecosystem,” Smith said.
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Compliance questions after a Bibit hack
Crypto-exchange and peer-to-peer protocols remain key compliance goals in the industry. To the authorities, these companies are viewed as important choke points where money laundering and broader financial surveillance management will be effective. At the same time, as seen in the tactics of the Lazarus Group, they are frequent candidates for sophisticated hacking and laundry operations.
The latest example comes from Bibit Hack, where the Lazarus Group is engaged in sophisticated money laundering schemes to concentrate its funds. Hackers quickly exchanged ether (ETH) low-fluid tokens and exchanged for Bitcoin (BTC) using a no-kyc (know customers) decentralized exchange.
“They have experienced KYC exchanges that probably wouldn't exist, but they also exist through decentralized protocols that had many liquidity provisions that could be put into Bitcoin,” Smith said, adding, “it's too easy as an industry.”
Smith also said that users continued to trade them through decentralized platforms, even after companies flagged them as stolen by funds. “Why is there so much liquidity available to wash this money?” he argued that those who provide liquidity to such protocols should be subject to a basic check of the source of funds and destinations. “Go and see who's making the money. That's the first place to start some control.”
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