“Suspicious” Crypto Firms See Exit Under New Regulatory Regime

Crypto firms have faced immense pressure to comply with and adapt to ever-shifting regulations. Around 400 firms in the Baltic region have faced serious repercussions as a result of tightened oversight. They may have no choice but to head for the door in the face of stricter requirements, a new report suggests.

Many cryptocurrency firms have tried to avoid regulatory showdowns and stay compliant with the constantly evolving regulatory agenda. The cryptocurrency industry has operated in a regulatory gray area for many years. Thus, leading to increased scrutiny and enforcement actions from regulators worldwide. In Estonia, internal issues at some firms have come to light, prompting the regulatory watchdogs to jump in. 

Crypto Firms and the Regulatory Climate

Cryptocurrency firms have taken myriad steps to avoid regulatory confrontation. Such as implementing robust compliance programs, performing due diligence on customers and partners, and adopting anti-money laundering (AML) and know-your-customer (KYC) measures.

They also engage with regulators and industry associations to stay informed of regulatory developments and contribute to developing industry best practices.

Cryptocurrencies and blockchain technology have brought about a wave of innovation and disruption. Creating new opportunities for businesses and investors alike. However, with this growth has also come a rise in the number of crypto firms with questionable credentials, dodgy executives, and nonsensical business plans. 

These firms often show a marked lack of transparency and accountability. Even a tendency to make exaggerated claims about the potential benefits of their products or services.

What Are the Red Flags to Consider?

1. Lack of Regulation: One of the most significant risks associated with crypto firms is more regulation and oversight. Many of these companies operate in unregulated or lightly regulated jurisdictions, making it difficult for investors to assess their credentials and track records.
2. Dodgy Executives: Another common problem with crypto firms is dodgy executives with a history of fraud or other criminal activities. These individuals may use their experience and reputation to lure in unsuspecting investors, only to disappear with their money once the business fails to deliver on its promises.
3. Nonsensical Business Plans: Some crypto firms also have business plans that don’t make sense or are based on questionable assumptions about the market or technology. For example, a company may claim to have developed a revolutionary new blockchain platform that can process millions of transactions per second, even though no evidence supports these claims.
4. Pump-and-Dump Schemes: Another common problem in the cryptocurrency industry is pump-and-dump schemes, in which individuals or groups artificially inflate the value of a particular cryptocurrency before selling off their holdings and leaving other investors with worthless assets.
5. Lack of Transparency: Finally, many crypto firms also need more transparency and accountability, making it easier for investors to assess the actual value of their investments. Some companies may refuse to disclose essential financial information or audit reports, while others may be involved in illegal activities such as money laundering or terrorist financing.

Forced Exit Due to Regulatory Conditions?

In some instances, strict compliance requirements have accelerated the exit of crypto firms or virtual asset service providers (VASPs) from a given region. One notable example is the case of BitMEX. A cryptocurrency derivatives exchange had to close its services to customers in the United States due to increased regulatory scrutiny.

In October 2020, the Commodity Futures Trading Commission (CFTC) and the Department of Justice (DOJ) filed charges against BitMEX. Alleging that the company had violated multiple regulations related to AML and KYC.

The charges included failing to implement adequate AML procedures. Allowing US-based customers to trade on the platform without proper KYC verification. And operating an unregistered trading platform in the US.

As a result, BitMEX was forced to shut down its services for US customers and implement strict measures to address the regulatory concerns. The company also agreed to pay a $100 million fine to settle the charges and committed to enhancing its AML and KYC procedures to avoid future violations.

Another example is the case of Binance, one of the world’s largest cryptocurrency exchanges. The company has recently faced increased scrutiny from regulators in several countries. Including the UK, Japan, and Thailand, due to concerns about its compliance with AML and KYC laws.

In both of these cases, the strict rules imposed by regulators have had consequences. They have seriously affected the ability of crypto firms or VASPs to operate in a region. As regulatory scrutiny continues to intensify in the crypto space, companies are forced to exit. Or suspend their services to comply.

Strict Policies Hit Estonian Firms Hard

Almost 400 virtual asset service providers (VASPS) have voluntarily shut down or had their authorizations revoked in Estonia, per a May 9 report. This comes on the heels of the government’s newly enhanced Terrorist Financing Prevention and Anti-Money Laundering laws, which came into effect in March.

Several issues were identified within local crypto firms, such as dodgy execs and nonsensical business plans.

Matis Mäeker, the Director of the Financial Intelligence Unit (FIU), questioned the motives of these crypto firms. 

“In the applications, we found very many suspicious circumstances on various topics. This calls into question the credibility of the companies that wanted to do business here – their actual desire to provide services in Estonia or, vice versa, shows the desire of certain persons to use the Estonian economic and financial system for illegal activities.” 

Virtual Asset Service Providers (VASPs) must comply with KYC requirements and cannot open anonymous accounts. The Transfer Rule in Europe’s Markets in Crypto-Assets bill requires exchanges to identify entities at both ends of a crypto transaction. Fines for breaches can reach $440,000. 

In addition, firms must pay over $50,000 to establish a company and pay about $11,000 monthly.

Self-Analysis Is Key

Regulators across the globe are taking measures to help investors by removing bad actors. But, self-analysis is a must. Investors should take several steps to protect themselves to avoid falling victim to these crypto firms. These may include:

1. Conducting Due Diligence: Investors should perform thorough due diligence before investing in any cryptocurrency or blockchain-related business. Mainly on the company’s founders, management team, and business plan. They should also investigate the regulatory environment in which the company operates. As well as any potential legal or reputational risks.
2. Diversifying the Portfolio: To minimize risk, investors should consider diversifying their portfolio across multiple cryptocurrencies and blockchain-related assets. This can help to reduce the impact of any individual asset’s performance on their overall investment returns.
3. Seeking Professional Advice: Investors may also benefit from seeking advice from professional financial advisors or cryptocurrency experts. They can guide the best investment strategies and help identify potential risks and opportunities.
4. Being Wary of Unusually High Returns: As with any investment, investors should be wary of any claims of unusually high returns. As these are often signs of fraud or other illegal activities.
5. Staying Informed: Finally, investors should stay informed about the latest developments in the cryptocurrency industry. Including regulatory changes, technological advancements, and emerging trends. This can help them make informed investment decisions and avoid risks and opportunities.

Overall, investors must be cautious when dealing with crypto firms and associated regulations.