Crypto Firms Shift Focus to Compliance Amid Regulatory Scrutiny

Elliptic co-founder James Smith has observed a significant shift in the mindset of crypto firms towards regulatory compliance. In the early days of the crypto industry, only a few companies, such as Coinbase, approached compliance seriously. However, as regulators, including those in New York State, began to take a more active interest in the industry, and traditional financial institutions like Fidelity and DBS Bank entered the space, the landscape started to change.

Smith noted that the involvement of traditional financial institutions brought established compliance expectations from traditional finance services into the crypto space. This shift has led to a situation where exchanges globally now prioritize compliance to be part of a global ecosystem. The change in mindset is evident as more firms recognize the importance of adhering to regulatory standards to avoid legal repercussions and to build trust with users and investors.

Crypto exchanges and peer-to-peer protocols remain key targets for compliance due to their role as critical choke points for Anti-Money Laundering (AML) and broader financial surveillance controls. These firms are also frequent targets for sophisticated hacks and laundering operations, as demonstrated by the Lazarus Group's tactics. The recent Bybit hack is a prime example, where the Lazarus Group used low-liquidity tokens and no-KYC decentralized exchanges to launder funds. Smith highlighted that the industry is making it too easy for such activities to occur, pointing out that even after funds were flagged as stolen, users continued to trade them through decentralized platforms.

Smith emphasized the need for basic checks on the source and destination of funds for those providing liquidity to such protocols. He argued that identifying who is making money from these activities is the first step in implementing effective controls. This shift towards compliance is crucial for the long-term sustainability and legitimacy of the crypto industry, as it helps to mitigate risks associated with money laundering and other financial crimes.