Back to the Future: Fulfilling Crypto’s Promise Through Compliance

By Amit Sharma and John A. Squires

The ongoing FTX debacle is just the latest in a series of recent cryptocurrency disasters (Terra-Luna, BlockFi, etc) which fundamentally calls into question not only the future of the sector, but also its very role within financial services.

Amit SharmaCEO and founder of FinClusive, a regtech company offering a global full-stack AML/FCC platform that connects traditional banking with blockchain and online financial services and virtual asset networks, along with John A. Squires, one of the world’s leading fintech/regtech lawyers and board member of FinClusive, explains why compliance is the way forward.

Some commentators are shouting that the FTX meltdown has triggered the “endgame” for crypto, while others worry about a prolonged “crypto winter”. Whether the rumors of crypto’s demise are greatly exaggerated or actually prescient can only be assessed by looking at the sector’s original value proposition. We need to rethink the role that virtual assets – and the technology that underpins them – can play for a better society in an increasingly digital global economy.

Crypto’s promise began when early enthusiasts looked to decentralize an entrenched economic system plagued with unbalanced centralized controls and a handful of dependent, costly “intermediaries” anointed as gatekeepers.

Early coins/tokens were not originally intended to be about asset speculation or to generate outsized returns. Still, exchanges and trading engines launched with abandon, as more virtual asset products poured into a market with a seemingly insatiable appetite – with many investors fueling this growth in pursuit of short-term returns.

No one seemed to be asking ‘for whose benefit and at whose risk?’. Thus, speculation and a “get in the game” became synonymous with crypto itself, preventing true value creation and innovation.

Back to basics

Crypto’s promise can be restored and realized only by a return to its first principles: provide universal, fair and secure access to the financial system; incorporate governance and accountability otherwise relegated to less well understood third parties; and ensure the transfer of value directly between counterparties (peer to peer – or P2P).

The good news is that there are a number of services and real businesses that can modernize governance and compliance, achieve security through universal access and privacy protection (e.g. digital identity), and facilitate the real-time transfer of value between people (payments) that already exists and is in use today!

Companies like FinClusive have been driving innovation in these areas for years, affecting real positive change through the use of distributed ledger technology (DLT), including embracing and embedding regulatory compliance to increase basic access to financial services and economic resilience and prosperity it gives .

Yes, you heard us right – compliance is the answer, not the enemy, and increased regulation and oversight should be embraced, not avoided. Given the events of 2022 and their aftermath, any demonstration of the sector’s dedication to innovation, democratization and change should begin with the words “risk and compliance”.

The importance of CaaS

In terms of “products”, FinClusive has pioneered an innovative compliance-as-a-service (CaaS) platform, an automated full-stack FCC solution in one workflow, designed for traditional banks to modern financial technology and online financial services. CaaS is built to support a wide range of industries and comply with modern global FCC standards and best practices in an increasingly cross-border, decentralized and P2P financial services environment.

As finance continues to become more cross-border, decentralized and peer-to-peer, innovative compliance solutions like CaaS are that much more important to individuals and organizations, especially those committed to the principles of a sound and trusted financial services economy.

“compliance is the answer, not the enemy, and increased regulation and oversight should be embraced, not avoided.”

But even at a high level – if true “democratization” is to be achieved, regulatory engagement is essential, as well as a demonstration of the rules we all agree and are willing to commit to. Enter the rulebook – a FinClusive and industry-led life policy framework for how the virtual resource and Web3 community can go.

Embedding compliance checks with the power of DLT can and will drive inclusion while enhancing the attributes of transparency, auditability and security. The rulebook represents a proactive and disciplined approach to governance in this sector. It democratizes crypto’s laudable core principles and is increasingly valued as a guide for non-financial companies developing and adding products for their customers and user base.

Important verifications

Increasingly, applications in the identity area are quickly becoming central to financial services and beyond. FinClusive has incorporated digitally verifiable credentials (FinClusive IDs or FinCIDs) as part of their KYC/KYB processes, creating a tool to manage key verifications required for financial services.

And, as the only non-bank issuer and verifier of Legal Entity Identifiers (LEIs), FinClusive has combined these technologies to deliver automated KYC and KYB verification, transparency and privacy protection, while building an ecosystem of trust between all parties. .

Furthermore, identities can be verified in near real time and can enable customers/partners to link these unique identifiers to underlying transactions. FinClusive’s ‘FinCIDs’ thus enable tracking and at the same time protect underlying personal information. In a world that increasingly involves cross-border interactions, with sometimes unknown counterparts, these applications promote safety, accountability and inclusion.

For industry, blockchain-enabled applications are currently and woefully underutilized as key security infrastructure components. Security must be central to every step and all products, delivery channels and data warehouses. NIST-based standards have been built into every aspect of FinClusive’s compliance-centric platform, which should be critical in all web-native and cloud-based global operating environments.

We have proven that this type of integrated, innovative security system can be built on top of decentralized compliance infrastructure, leveraging powerful attributes of the blockchain. It is high time that this idea is really made practical throughout the industry as well.

Next step

That changes are coming could not be more clear – especially considering the regulatory backdrop in which virtual assets operate. Whether the industry more broadly also chooses to bring crypto back to its promising future remains to be seen, and investors play an important role in this recalibration.

If the sector chooses, highlighting crypto’s true use cases (compliance, security, digital identity and payments) can carry the day, because they have real, tangible benefits for society – from financial inclusion to promoting real economic growth, resilience and achieving greater security, soundness and security from a technology that has been categorically underutilized in these ways to date. If so, we can all capture and benefit from the true and realizable promise virtual assets can bring to the global economy.

By Amit Sharma and John A. Squires