March 10, 2023

Towards a Future-Ready Blockchain Ecosystem: How to Build a Compliant Crypto Project

Unregulated markets, whether on– or off-chain, can pose risks to buyers, sellers, investors, and consumers alike.

Crypto is currently facing a particularly acute reckoning due to its reputation for facilitating crimes such as money laundering, terrorism financing, and fraud.

Complying with laws that already exist can be difficult. Failure to do so has cost legitimate crypto innovators dearly. Ripple is still facing a lawsuit from the SEC, Binance was fined by the UK's FCA, and BitMEX had to settle a CFTC lawsuit for $100 million.

Legal woes are not limited to exchanges only. People participating in projects like BitInstant and My Big Coin received heavy penalties — years in prison and fines worth millions of US dollars.

Compliance means following the rules and laws to prevent crimes and harms, protect customers and investors, and maintain fair markets. The fundamental principles of blockchain technology, transparency, trustlessness, and decentralization are not at odds with this. Quite the contrary: compliance is essential for mass adoption of blockchain technology and tokenization. Crypto cannot attract more users and innovators if it doesn't provide safe, open, and trustworthy services for legitimate purposes and ordinary users.

This is why Flowdesk strives for a cultural change within the industry that puts compliance first. Leading by example, setting a new standard not only for market making, but for all of crypto is a core mission of ours.

The overview of Flowdesk’s client verification process. Clients go through several checks before accessing Flowdesk services. This is to ensure safety and accountability for all partners, clients, and their users.

Such a change requires more, clearer regulation from legislators and fair enforcement from authorities.

But the blockchain community and crypto industry cannot sit back waiting for new rules to be set.

To build sustainable markets and business models driving mass adoption, projects, organizations, and companies need to comply proactively. They must start implementing the best practices of traditional sectors. This can marry the best in blockchain technology, transparency and access, with the institutional guarantees that exist in traditional industries, services, and finance. Only this way can crypto overcome the actual shortcomings of TradFi, its centralization, high fees, sluggishness, non-transparent relationships, and excessive control — as well as its own flaws.

To achieve this, there are several essential steps to take.

  1. Determine the applicable regulations in the jurisdictions where the business or community operates This includes local financial and business regulations, taxation laws, as well as international agreements. Licenses and regulations for money transmission, securities trading, and other activities (in the US, these may bear different names in different states and entail different permissions) need to be carefully considered. Anti-money laundering (AML), Counter-Terrorism Financing (CTF), Politically Exposed Persons (PEPs) and sanctions list checks, as well as Know-Your-Customer (KYC), Know-Your-Business (KYB), and Know-Your-Transaction (KYT) verifications. Legal experts and specialized companies such as Elliptic, Merkle Science, Chainalysis, and many more can provide help.
  2. Establish compliance policies and proceduresThese policies must include processes for collecting and verifying customer information, monitoring transactions for suspicious activity, analyzing data, and reporting suspicious activity to the relevant authorities.
  3. Obtain mandatory registrations, licenses, and approvals required by the government and regulatory authorities
    Authorities’ approval is not only a “badge of honor”. It is about clients’ and partners’ privacy and safety: reassuring them that their assets and sensitive data are secure at all times.
  4. Maintain processes and records
    Companies and organizations should keep detailed records of transactions, customer information, and compliance activities. They must be prepared to provide these to regulatory authorities upon request.
  5. Partner with compliant services and organizations
    Compliant projects and communities must collaborate only with partners, service providers, and clients who are themselves compliant. This does not only help avoid reputational damage. Like-minded partners and customers also incentivize resource and knowledge sharing, making a crypto project’s business and communities more resilient and future-ready.

By taking these steps, companies and communities can ensure that they comply with regulations, maintain users' privacy and safety, and establish trust with their clients. Embracing this attitude is crucial to remake crypto so that it can make good on the original promises of blockchain technology.