The cryptocurrency sector has experienced a notable transformation towards regulatory adherence since its inception, as stated by James Smith, co-founder of Elliptic, a compliance firm for crypto launched in 2013.
“Initially, only a handful of companies took compliance seriously,” Smith conveyed to Cointelegraph at the Token2049 event. “Coinbase was our inaugural client — they recognized from the beginning that they aimed to shape their business this way. Yet for the majority, it simply wasn’t a key focus.”
This began to change as regulators, particularly in New York State, displayed a heightened interest in the crypto sector. The entrance of traditional financial entities like Fidelity and DBS Bank also played a role, as they approached the industry with established compliance expectations derived from traditional financial services.
For example, Fidelity launched its initial crypto service for clients in 2019, while the Asian powerhouse DBS established a digital exchange for accredited and institutional participants in 2020.
“We’ve witnessed a significant transformation in the past few years. Exchanges globally are now concerned about compliance, as they aspire to be part of a worldwide ecosystem,” Smith remarked.
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Regulatory inquiries post-Bybit breach
Crypto exchanges and peer-to-peer systems remain principal compliance targets within the industry. Authorities view these entities as vital choke points where Anti-Money Laundering and broader financial oversight measures are implemented. Simultaneously, they are frequent targets for sophisticated cyberattacks and laundering schemes, as evidenced by the tactics of the Lazarus Group.
The latest instance is the Bybit breach, where the Lazarus Group executed a complex money laundering operation to redirect assets. The hackers swiftly traded low-liquidity tokens for Ether (ETH), subsequently exchanging them for Bitcoin (BTC) via decentralized exchanges lacking KYC (Know Your Customer) procedures.
“They navigated through some no KYC exchanges, which possibly shouldn’t exist, but also through a decentralized system where a wealth of liquidity facilitated their conversion into Bitcoin,” Smith explained, emphasizing that “we’re enabling this too easily as an industry.”
Smith also pointed out that even after companies identified the funds as misappropriated, users persisted in trading them on decentralized platforms. “Why was there such abundance of liquidity available to aid in laundering this money?” he inquired, asserting that entities providing liquidity to these protocols should undergo fundamental checks on the origins and destinations of funds. “Investigate who’s profiting. That’s the initial step towards instituting regulations.”
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