Is It Possible to End Fraud and Unregulated Exchanges in the Crypto Space?

The cryptocurrency market and space has been plagued with fraudulent schemes, exchanges, practices, and participants. This is something that has affected the integrity of the market and of virtual currencies. Some of these things include Ponzi & pyramid schemes, twitter bots that impersonated well-known figures trying to steal cryptocurrencies from users, and many others.

Could We End Crypto Fraud?

The cryptocurrency industry is not the only economic sector that has been negatively affected by fraud. However, it is very important for users in the space to know that they are operating in a safe environment rather than in an unregulated space where each participant can do what it wants.

The Texas State Securities board has already investigated 32 different crypto promoters in just four weeks. Five of them failed to tell the investors about the risks they have rather than guaranteeing returns of up to 40 percent a month. Moreover, according to The Next Web, two-thirds did not provide a physical address. These are some of the red flags that users must pay attention to.

Consumer fraud is one of the many different types of fraud that investors could find. PWC’s 2018 economic survey reveals that 29% of the companies explained that they have never suffered from consumer fraud.

With cryptocurrencies, users’ information is protected. However, these digital assets allow criminals to perform illegal activities that can affect users and investors. PwC NL knows that this is a very important risk for virtual currency-related businesses and they have a large number of employees dedicated to organizations in the crypto domain.

Another issue that has affected the crypto community is related to money laundering activities through unregulated exchanges. As soon as hackers have access to crypto funds, they need to exchange them and move these funds to fiat currencies. In order to do so, they work with many unregulated exchanges and extract the funds as soon as possible.

Unregulated exchanges have a lax know-your-customer (KYC) policy and users’ identity is not shared with the company. Indeed, it might be possible for individuals to extract 2 BTC per day without a full identity check.

As reported by TNW, unregulated exchanges could come to an end in the near future, as soon as the 5th EU anti-money laundering directive (5AMLD) comes into force as soon as in January 2020. There are three main changes that will be affecting how cryptocurrencies and digital assets will be regulated in the future.

First of all, cryptocurrencies are going to be considered “obliged entities” and they will have to perform customer due diligence. They will also have to submit suspicious activity reports (SAR) to the authorities.

Second, financial intelligence units (FIU) can be mandated to obtain addresses and identities of crypto owners. Thus, this will end with the anonymity in the crypto market. Third, crypto exchanges and wallets will have to be registered with the local authorities if they want to offer their services in the European territory.

Although this will not reduce 100% fraudulent activities, it will be possible to see a reduction of fraudsters and criminal activities working with cryptocurrencies. With the lack of anonymity, authorities will be able to trace transactions in an easier way.

It is worth mentioning that different Initial Coin Offerings (ICOs) have been involved in pump and dump schemes. The intention behind these pump & dump schemes was to help early investors to sell a specific digital asset at a high price. After it, the market plummeted and late investors lose large sums of funds. This is clearly a way of manipulating crypto prices.

The 5AMLD will also deter these pump & dump schemes that were promoted throughout 2017 and the beginning of 2018. Even now there are groups on social media that promote pump and dumps in small-cap coins that are subject to high volatility due to their low liquidity. With these new regulations, it will be possible to identify these schemes and tackle them to avoid investors losing their funds in the future.

There are different ways in which users can protect their funds. First of all, PwC recommends users to generate their private keys in a secure and confidential way, protect digital assets with secure key storage, multi-sig wallet configuration, and more.

It is also important to protect the devices used to secure private keys, and have clear wallet management that divides virtual currencies across hot, cold and multi-sig wallets. This is quite important since crypto exchanges have been hacked in different situations and they have lost the funds that they managed for users. Many investors have lost their funds in crypto exchanges due to hacks to their services.

Japan, for example, has implemented very clear regulations for companies to operate in the country. Those that want to offer crypto exchange services must follow strict rules in order to ensure that the funds they hold on behalf of their clients are properly protected and secured.

Although it is not an easy task to regulate the cryptocurrency market, there are jurisdictions that are starting to take care of their investors by providing a clear legal framework for crypto companies to build their services on.

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