A Guide To Crypto Compliance In The U.S.

How U.S. regulations operate 

In the United States, the regulatory framework for cryptocurrencies can be complex, with different jurisdictions having their unique focus and jurisdiction. These regulatory bodies work together to ensure compliance and address different facets of the crypto industry:

Securities and Exchange Commission (SEC): The SEC is charged with the oversight and enforcement of laws related to securities. It holds a significant role in determining if a cryptocurrency is classified as a security, regulating Initial Coin Offerings (ICOs), and enforcing the obligations of registration and disclosure.

A Web3 business aiming to raise funds through an ICO or a Security Token Offering (STO) must comply with SEC regulations. If the token is deemed a security, the business must register the offering with the SEC and provide comprehensive disclosures about the company and associated risks.

Given recent SEC lawsuits against Binance and Coinbase, the SEC now considers a wide range of tokens such as ADA, MATIC, NEAR, among others, as securities, potentially leading to strict regulatory requirements.

Failure to comply can result in severe penalties, as demonstrated by the case of Telegram, which was compelled to return $1.2 billion to investors and pay an $18.5 million fine for conducting an unregistered offering of their "Grams" token.

Financial Crimes Enforcement Network (FinCEN): FinCEN focuses on combating money laundering and terrorist financing activities. It mandates crypto businesses, including exchanges and money transmitters, to register and implement robust AML/KYC measures to prevent illegal financial transactions.

Web3 businesses, especially those involved in financial transactions like exchanges or wallets, must comply with FinCEN's AML and KYC regulations. This involves implementing systems to identify and verify customers, monitor transactions for suspicious activity, and report certain transactions. 

For example, in 2020, Larry Dean Harmon, the operator of Helix and Coin Ninja, was fined $60 million by FinCEN for violations of the Bank Secrecy Act related to his convertible virtual currency businesses.

Commodity Futures Trading Commission (CFTC): The CFTC is tasked with regulating commodities, including certain cryptocurrencies like Bitcoin. It focuses on ensuring fair trading practices and market integrity in derivative markets, such as futures and options trading.

If a Web3 business is involved in trading cryptocurrencies considered commodities, such as Bitcoin, it must comply with CFTC regulations. This includes ensuring fair trading practices and maintaining market integrity. 

Failure to comply can lead to substantial fines, legal repercussions, and the loss of trust from customers and partners. In 2021, BitMEX faced a $100 million charge from the U.S. Commodity Futures Trading Commission (CFTC) for unlawfully operating a crypto trading platform and violating AML regulations.

Internal Revenue Service (IRS): The IRS treats cryptocurrencies as property for tax purposes. Individuals and businesses involved in cryptocurrency transactions are required to report them and pay applicable taxes, including capital gains tax.

Web3 businesses must also comply with IRS regulations regarding the taxation of cryptocurrency transactions. This includes reporting all cryptocurrency transactions, calculating and paying any capital gains tax, and providing tax forms to customers. 

State-specific regulations: In addition to these federal regulations, some states have introduced their specific regulations for cryptocurrency businesses operating within their borders. Notably, the New York BitLicense imposes particular requirements on crypto businesses operating in New York.

Best practices for ensuring crypto compliance 

Given the heightened regulatory focus on the risk management practices of crypto firms, it's vital to prioritize the following best practices:

1) Leverage on crypto compliance solutions

If you’re a crypto exchange, wallet, custodian, or Web3 business that handles a large number of trading transactions, you must have AML and KYC solutions in place. 

Several companies provide AML, KYC, KYT, and KYB services to crypto businesses. They develop compliance solutions for cryptocurrency businesses in the form of AML software and identity management/monitoring services. 

It’s necessary to formalize crypto compliance measures by partnering with AML/KYC firms to simplify and stay compliant with your crypto transactions. 

With the growing number of institutional investors adopting DeFi platforms and increasing regulatory interest, DeFi platforms are also starting to use compliance services offered by KYC/AML providers.

Below is a list by Blockdata, of some of the leading companies that provide compliance solutions that you could take reference from: 

2) Set up internal controls and reporting mechanisms

Maintaining a dynamic approach to risk management involves constant evaluation and reassessment of risks associated with customers, products, and geographical factors. This means developing comprehensive risk mitigation strategies and robust internal controls to effectively address identified risks.

For example, a holistic risk mitigation strategy could encompass a layered approach. On the customer front, this could involve stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) checks to authenticate customer identities and scrutinize their transaction behaviors.

At the product level, it could involve routine audits and penetration testing to pinpoint potential vulnerabilities in your products and proactively address them. This could be supplemented by a solid cybersecurity framework to guard against external threats.

Internal controls could encompass the segregation of duties (ensuring more than one person is involved in critical processes), access controls (ensuring only authorized individuals can access sensitive information), and regular internal audits to evaluate the effectiveness of these controls.

To help with internal controls, crypto payment apps like Request Finance has features like roles and permissions that allow you to easily add team members and customize their access levels to ensure the security of sensitive information. 

3) Maintain proper record-keeping

Proper record-keeping sets the foundation for crypto accounting. 

By monitoring all your crypto transactions and maintaining proper documentation, it eases the auditing process and ensures adherence to regulatory standards. 

However, cryptocurrency transactions involve unique identifiers, multiple addresses, and can have varying transaction fees. Tracking and recording these manually can be time-consuming and prone to errors. The fluctuations in the value of cryptocurrencies further complicate the process of recording transactions and holdings accurately. 

With a dedicated crypto payment solution like Request Finance, you can maintain proper record-keeping of all your crypto transactions while ensuring crypto compliance. It offers a user-friendly interface where transactions can be completed with a single click, minimizing the risk of clipboard malware. 

For all invoices that are successfully generated, they automatically appear in your dashboard. An invoice entry consists of crucial information that’s needed for effective payment tracking for compliance, including:

• - The date the invoice was issued
• - A description of the transaction
• - The payable amount (denominated in fiat)
• - The payment status (whether it's Paid, Awaiting payment, Canceled, or Rejected)
• - Other actions (such as Cancel invoice, Pay invoice, Download receipt)

In addition to a summary view of invoice payment statuses, the dashboard allows you to access each invoice individually for more detailed information. By clicking on any invoice, you can delve into granular details such as business information, discounts, taxes, and more.

Using Request Finance, all your data remains secure and confidential - just like how over 2,300 businesses that have already placed their trust in Request Finance to streamline their crypto invoicing processes and safeguard their financial operations.

Staying ahead in crypto compliance

The regulatory landscape is ever-changing, much like the world around us, and it's your responsibility to stay informed and adapt accordingly.

Make it a habit to regularly review and monitor changes in laws, regulations, and guidelines related to cryptocurrencies. Just as you would adjust your business strategy in response to market trends, you must continually fine-tune your compliance measures to align with the latest requirements.

Remember, crypto compliance isn't a one-time task, but an ongoing commitment.