Companies involved in the cryptocurrency industry, along with their leadership, need to ensure that their compliance teams have individuals who possess a deep understanding of blockchain technology. Blockchain is the foundation of cryptocurrency activities, and this knowledge is essential to maintaining effective compliance. These teams must not only educate employees on compliance standards but also inform regulators about the company's products and operations in the crypto space. Ensuring clear communication with both internal staff and regulatory bodies is key to building a strong and defensible compliance framework.

Anti-Money Laundering (AML) Procedures

A primary focus for compliance strategies in cryptocurrency businesses is the establishment of a comprehensive anti-money laundering (AML) program. Due to the decentralized and pseudonymous nature of cryptocurrencies, regulators often view the space as a potential vehicle for illicit activities. In fact, failure to comply with AML standards is frequently a leading charge in regulatory actions against crypto companies. Without adequate AML protections in place, businesses are vulnerable to both regulatory scrutiny and exploitation by bad actors engaging in money laundering and other financial crimes.

Crypto companies must go beyond traditional AML practices by incorporating crypto-specific tools and methods. These may include using blockchain intelligence solutions to detect suspicious or terrorist-linked crypto wallets. Additionally, companies need to ensure compliance with the Bank Secrecy Act (BSA). For example, Bittrex, a crypto exchange, was fined over $24 million in 2022 for failing to meet BSA and AML regulations. The fine was imposed by the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN) for failing to screen customer data adequately, despite knowing that some of its users were located in sanctioned jurisdictions.

Violations of the BSA can lead to criminal charges, as illustrated by the case of BitMEX. In May 2022, the former CEO of BitMEX received six months of home detention and a $10 million fine for not implementing a proper AML program, including a "know your customer" (KYC) verification process. Additionally, BitMEX had previously settled with the CFTC and FinCEN in 2021 for $100 million due to BSA and AML violations.

Retention Policies

Retention policies, which vary based on country-specific regulations, ensure that companies keep client and transaction data for a set minimum period. The types of information retained generally include:

• Client identification data and related documents
• Transaction records
• Customer communication
• Marketing and promotional materials

These records help protect both the company and its customers by ensuring traceability and transparency in case of future inquiries or disputes.

Third-Party Due Diligence

When working with third-party vendors, crypto companies should adopt a risk-based approach to due diligence. Regulators expect businesses to be responsible not only for their own compliance but also for the actions of the third parties they engage with.

This is particularly true in the cryptocurrency sector, which is seen as inherently high-risk due to the novelty of the technology and the evolving regulatory environment. As such, regulatory scrutiny on third-party relationships is likely to be intense. Companies should take extra care when engaging with third parties, especially those involved in marketing and development through non-traditional channels like social media and podcasts. Thorough due diligence on potential partners is crucial before entering into any agreements.

Audits

Effective compliance programs utilize both internal and external audits to proactively identify and address potential issues. Conducting audits regularly allows companies to test the strength of their compliance measures, ensuring they meet regulatory expectations. For regulators, these audits demonstrate a company’s commitment to compliance and help reduce concerns about weak compliance cultures. This is especially important in the crypto space, where regulators often struggle to understand the underlying technologies and develop theories of legal accountability.

Privacy and Data Security Concerns

Operating within the digital realm, cryptocurrency companies face significant risks from data breaches, cyberattacks, phishing scams, and malicious actors. As cryptocurrency grows in popularity, it becomes an attractive target for scammers. Because blockchain-based transactions do not involve traditional financial intermediaries, recovering stolen funds is more difficult.

To combat these risks, compliance officers must implement robust data protection measures. These safeguards should cover internal company data, information shared with partners, and consumer data, while also protecting the assets of both the company and its customers. Tailored security provisions are essential to prevent cyber threats and ensure the long-term stability of the business.