After the Binance settlement case, how should the cryptocurrency industry align with regulations?

In the wake of the Binance settlement case, how can the cryptocurrency industry effectively comply with regulations?

Author: CryptoBrand

In an environment of increasing regulation in the cryptocurrency industry, projects need to consider regional differences, follow regulatory policies, make good use of beneficial tools, and achieve global growth in a compliant manner.

On November 21, 2023, Binance, the world’s largest cryptocurrency exchange, announced a $4.3 billion settlement agreement with the U.S. Department of Justice and the Securities and Exchange Commission (SEC). As part of the settlement, Binance’s founder, Changpeng Zhao (CZ), agreed to step down as CEO of Binance and admitted to violating the U.S. Anti-Money Laundering (AML) and Securities Act.

$4.3 billion + CZ stepping down, this 2-year litigation dispute has finally come to an end. Looking back at the history of cryptocurrencies, due to their rapid development, they have faced pressure and challenges from governments and regulatory agencies around the world within just 14 years. In the past few years, many Web3 projects have been sued, fined, banned, or restricted for alleged violations of securities laws, money laundering laws, tax laws, and other regulations. These cases have not only affected the operation and development of projects but also sparked dissatisfaction and protests within the community.

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This article aims to analyze the reasons behind the regulation of the cryptocurrency industry, outline the policies of various regions towards cryptocurrencies, and delve into how projects can achieve global growth while avoiding policy sanctions.

(Source: Metaverse NEWS)

Why are regulatory agencies paying more attention to cryptocurrencies?

• Inherent Responsibility

The primary responsibility of regulatory agencies is to ensure market order and protect public interests. They need to oversee various industries, including the cryptocurrency industry, to prevent misconduct and safeguard social stability.

• Consumer Protection

Regulatory agencies need to protect consumer rights and emphasize prevention of improper and fraudulent behavior. In the cryptocurrency field, they focus on user information security, compliant transactions, and transaction transparency. In March 2021, the leading U.S. compliant cryptocurrency exchange, Coinbase, was accused by the CFTC (U.S. Commodity Futures Trading Commission) of misleadingly reporting trading volume and engaging in “self-trading.”

• Preventing Criminal Activities and Maintaining Social Stability

The native concept of the cryptocurrency industry: decentralization and resistance to censorship make it an easy breeding ground for crime. If not regulated, it could threaten social stability. One of the tasks of regulatory agencies is to prevent money laundering, illegal transactions, and other illegal activities to ensure the stability of the political and economic system.

As shown in the graph above, many projects have been accused of illegal issuance of securities. Two of the top-ranked cases settled involved violations of anti-money laundering laws.

• Tax Compliance

Regulatory agencies need to ensure tax compliance in the cryptocurrency industry. Due to the rapid development of the industry, regulatory bodies need to take effective measures to ensure that relevant taxes are collected in a timely manner, maintaining national fiscal order. Regulatory agencies should also specify financial compliance requirements for enterprises and individuals in the industry to prevent tax evasion, tax avoidance, and tax fraud.

• International Cooperation and Legal Framework

The cryptocurrency industry has cross-border characteristics, with transactions and activities often involving multiple countries and regions. Regulation is necessary to ensure international cooperation and coordinate regulations and standards across different legal jurisdictions to prevent cross-border illegal activities and money laundering.

• Risk Transmission and Financial Stability

The 24/7 operation of the cryptocurrency market, cross-border trading activities, significant trading volumes, substantial price fluctuations, and sensitive market sentiments make it highly unstable. Good regulation can ensure a certain level of segregation between the cryptocurrency industry and the traditional financial industry. By regulating market participants’ behavior and setting reasonable trading rules and standards, regulatory agencies can help prevent the transmission of risks from the cryptocurrency market to the traditional financial system.

• National Inflation Control

The transfer of coinage rights and control over inflation to algorithms and protocols increases the difficulty of national inflation control. Regulatory agencies need to monitor with caution to ensure the stability of the national economy.

Open Attitude in Tightening Regulation

Despite the increasing strictness of regulations, most regulatory agencies have a positive attitude towards the cryptocurrency industry instead of directly banning it for various reasons: First, institutions support innovation and recognize that Web3 technology has the potential to solve some of the issues left by Web2. Second, compared to the traditional financial industry, the Web3 industry is relatively small in size, and a ban could hinder innovation and development. Therefore, globally, most countries still maintain a neutral or open attitude towards Web3, expecting it to bring new vitality to the financial system under regulatory compliance. In previous articles, the author summarized the policies of certain regions towards the cryptocurrency industry.

Why Pursue Compliance: Opportunities, Challenges, and Sustainable Development

What does compliance mean in the cryptocurrency industry?

This is a complex question because different countries and regions have different regulatory policies and attitudes towards the cryptocurrency industry. Generally, compliance means adhering to local laws and regulations, such as securities laws, anti-money laundering laws, tax laws, privacy laws, etc., and being subject to scrutiny and supervision by relevant regulatory authorities. Compliance also entails certain costs and risks, such as applying for licenses, paying fines, providing user information, cooperating with investigations, etc.

Which projects in the cryptocurrency industry are more likely to face strict regulation?

In the cryptocurrency field, different tracks may face varying degrees of regulatory risks and challenges. Generally, tracks involving financial services, user identities, cross-border transactions, market activities, etc., are more likely to attract regulatory attention and intervention. For example: CEX, DEX, wallets, payment platforms, and products related to RWA. As shown in the chart above, law enforcement activities in the United States primarily target projects involving assets, especially those related to the traditional financial system. These projects require much more effort to obtain regulatory compliance compared to projects in other tracks.

What benefits can compliance bring to projects?

On one hand, compliance can enhance the reputation and legitimacy of projects, increasing the confidence and participation of users and investors, and promoting the overall health and sustainable development of the industry. On the other hand, compliance can help prevent or reduce conflicts and disputes with regulatory authorities, protecting the rights and interests of projects and users and preventing bans or restrictions. Additionally, compliance can facilitate integration and collaboration with the traditional financial industry, expanding market opportunities.

Currently, achieving comprehensive compliance in the cryptocurrency industry faces many difficulties and challenges. Projects also have their own obstacles: varying regulatory policies in different regions. What measures can projects take to mitigate regulatory risks?

Global Growth Strategies Under Regulation

Adaptation to Local Conditions

Cryptocurrency projects need to provide different services and products based on different markets and users, or develop dedicated platforms and versions for certain countries and regions to comply with local regulatory requirements and meet user demands. For example, BitMEX avoids the risk of being subject to US laws by not offering trading pairs involving the US dollar or related stablecoins such as USDT or USDC.

Establishment of a Professional Legal Team

By employing a professional legal team to research and analyze the regulatory environments and requirements of different markets, projects can seek advice and guidance on compliance, handle potential legal disputes and risks, and maintain good communication and cooperation with local regulatory authorities and law firms. For instance, Richard Teng, who recently replaced CZ as Binance CEO, is an expert with over 20 years of financial regulatory experience.

Ensure Company Structure and Operations in Regulatory-Friendly Areas

Because regulatory efforts vary in different regions, projects can consider relocating their headquarters, servers, and operations to policy-friendly areas. For example, the cryptocurrency trading platform FTX relocated its headquarters from Hong Kong to the Bahamas because the Bahamas has more crypto-friendly and lenient policies.

For the nascent cryptocurrency industry, most projects have a flat organizational structure, a lean team, and limited funding, making it difficult to adapt strategies to different regions or recruit specialized legal teams and executives. Even exchanges like Binance with professional legal teams cannot completely avoid the risks of regulation. For startups, completely avoiding regulation is a pipe dream — the goal is to minimize regulatory risks:

Block Prohibited Regions

While attitudes toward the cryptocurrency industry are generally ambiguous worldwide, there are regions that have explicitly banned cryptocurrency activities, which are legal red lines that must not be crossed. For small projects, it may be more cost-effective to block IP access from these regions rather than launching different services and products to cater to their demands.

Balance Globalization and Localization

However, for projects without mature legal teams and just starting out, their operational strategies tend to be extensive. It is impossible to implement fine-tuned operational strategies for every region. But as regulations become stricter, overly extensive operational strategies can easily get into trouble.

When resources are scarce and project personnel are tight, it is not feasible to achieve compliance on a large scale. In this case, it is necessary to choose the regions with higher cryptocurrency acceptance and invest the majority of resources and efforts there. According to The 2023 Geography of Cryptocurrency Report published by Chain Analysis in October this year, the top 10 regions with higher user cryptocurrency acceptance are: India, Nigeria, Vietnam, the United States, and so on.

When conducting region-specific operations, selecting regions with higher user acceptance will lead to more effective operational strategies. Once the project is stably operational and funding is sufficient, then the focus can shift from extensive operations to fine-tuned ones in other regions.

Localized Operations

When you have chosen a region to operate in, localizing operations involves considering not only cultural and religious differences but also tailoring designs and language to cater to the sentiments of local users. Additionally, regulatory efforts in the region should be taken into account. For example, Binance includes risk warnings on some sensitive promotional materials when operating in Pakistan.

For projects with limited budgets, sacrificing some of the poster’s aesthetics to avoid regulatory disputes is the safest approach. This practice can effectively and efficiently protect the project from the risks associated with regulations when promoting the project.

For global growth, choosing the right region while considering regional religious and cultural differences, as well as varying regulatory policies, may still be overwhelming for a nascent project. Properly utilizing tools can achieve greater efficiency with less effort:

Harnessing Tools for Efficiency

In Web2 growth platforms, Gleam stands out among the numerous growth tools as a killer application that assists projects in achieving low-cost user growth through a mutually beneficial model.

Web3 has its own version of Gleam: Galxe, TaskOn, Zealy, and more.

These Web3 growth tools are also involved in the industry themselves, and some platforms have even issued their own tokens, like GAL from Galxe. These platforms host numerous growth activities daily, naturally paying attention to regional compliance issues and mitigating the problems caused by regulations to some extent.

In addition to helping projects achieve high ROI in user growth, these platforms also provide an extra layer of compliance assurance. Some growth platforms have added features allowing users to customize region restrictions: when launching campaigns, restrictions may be placed on specific IP addresses from participating or limited only to certain regions.

• Restricting regional IP participation: This can effectively block regions where cryptocurrency is explicitly prohibited. Additionally, it temporarily curbs risks in jurisdictions with increased regulatory oversight.

• Allowing only regional IPs to participate: This can be used to launch region-specific campaigns, ensuring more precise customer acquisition and avoiding potential regulatory risks in other regions. It also helps prevent misunderstandings due to cultural or religious differences.

The cryptocurrency industry will eventually embrace regulations, which is a consensus within the industry. However, the current regulatory policies vary in different regions, which means that projects within the industry continue to forge ahead in uncharted waters. At this stage, for startup projects, it is like the Eight Immortals crossing the sea, each showing their own special skills: the future of their own projects not only depends on compliance with regional regulatory policies, but also requires making full use of tools to adapt to the ever-changing trends in the cryptocurrency domain and accumulate their own user capital.

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