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As crypto licences loom, start-ups must solve compliance challenges quickly

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The Asia-Pacific (APAC) cryptoasset industry has experienced rapid innovation coupled with uncertainty driven by extreme market volatility. In this environment, crypto providers must convince consumers and regulators they are trustworthy and safe to deal with. As regulatory scrutiny of the sector grows and licensing regimes loom, they will also need to quickly prepare to convince authorities they are operationally sound, or risk being barred from the industry.

In APAC, and around the world, many regulatory jurisdictions are urgently seeking to implement frameworks and licensing regimes for the crypto industry. They are increasingly concerned about investor safety and uncertainty as the products become more mainstream and consumer appetite expands.

Asia-Pacific region has one of the highest adoption and growth rates for cryptocurrencies in the world. A Gemini report said: “2021 was a breakout year in Asia Pacific.” 45% of all crypto owners in the region were new to it that year. The region also has some of the world’s highest crypto adoption rates, with Indonesia (41%) ranked number one, and Singapore (30%) and Hong Kong (24%) in the top ten. Many people in the region – including 61% in Indonesia and 59% in India – believe “crypto is the future of money”.

However, weak regulation is a concern that hinders greater adoption in APAC, as it does globally. According to Gemini, 39% of people in Asia-Pacific who haven’t bought cryptocurrency highlighted the legal uncertainty around using it; and 26% said they don’t trust it.

Regulators are responding to such concerns by requiring crypto providers comply with rule frameworks on anti-money laundering (AML), know your customer (KYC), counter financing of terrorism (CFT) and effective technology risk management. Providers will also need to prove to regulators that they have clear processes; understand their operational risks; and manage and mitigate known or potential impacts effectively.

Don’t overlook resilience challenges

Most crypto service provider start-ups will need to perform several operational readiness and resilience activities to satisfy regulators’ new licensing requirements. These activities contain multiple challenges, as follows.

  • Start-up skills sets: Most early-stage service providers are extremely good at delivering specialised products and services. However, they often lack the expertise to effectively identify, manage, and mitigate the related operational risks or deficiencies.
  • Opportunity costs: Crypto start-ups focus on the latest developments in crypto and decentralised finance (defi) to stay ahead of competitors. But they often overlook the foundations of effective operational excellence such as process maps, standard procedures, operational risk and resilience. This leads to a lack of documented processes and dependencies across functions, increased errors, and risks with little control.
  • Limited capacity: Young firms also tend to run lean operations to manage costs while growing. This means many key personnel have to wear multiple hats from day to day, which limits their capacity to focus on operational readiness and rigour that often requires dedicated attention.

Overcoming the challenges

These challenges make it extremely difficult for crypto providers – especially start-ups – to focus on the operational readiness and resilience activities necessary to satisfy regulators. But if they don’t get this focus quickly, they will likely be barred from operating when licensing regimes are implemented and application deadlines pass.

To overcome these challenges, providers will likely need external expertise and support to help them fast-track the necessary uplift of operations. They can do this by identifying gaps, documenting processes, developing standard procedures, capturing business impacts, assessing risks, and developing business resilience and continuity plans.

These activities will help to build trust and increase confidence with consumers and regulators. They will also accelerate organisation’s ability to showcase effective management capability, through:

  • Documenting operational practices and artefacts
  • Deep understanding of potential impacts and inherent risks
  • Clearly defining plans to manage or mitigate identified areas of concern.

As a result, crypto providers will become significantly stronger operationally and in a much better position to meet upcoming regulatory licencing requirements.

How Delta Capita can help

Delta Capita has an experienced and dedicated team that provides expertise in digital assets regulatory compliance across many financial institutions.

This experience gives us a good view of industry best practices and financial regulations. For organizations impacted by these changes, we can provide valuable insights and ensure your firm is always aligned with the latest regulations and licenses.

To find out more and speak to one of our experts, contact us.