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What is exchange compliance?
A cryptocurrency exchange is the digital platforms in which both buying and selling of different cryptocurrencies (e.g., Bitcoin, Ethereum, Litecoin) is available. When deposits, withdrawals, or purchases of cryptocurrencies are made with fiat money within an exchange, that exchange can define its own set of operations. Since there is no regulated set of crypto exchange operations, some crypto exchanges follow exchange compliances to help mitigate the risk of fraudulent behavior. Examples of such compliances include but are not limited to Know Your Customer (KYC) for customer onboarding, Anti-Money Laundering (AML) for controls, identity verification as a security feature, and Strong Customer Authentication (SCA) as multi-factor authentication access for security purposes. Not every exchange has adopted such compliances, but these compliances are trending as a form of cyber security to protect digital investments.
Fraud prevention aside, exchanges also need to be compliant with the Internal Revenue System (IRS). The majority of crypto exchanges are required to track and report transactions to the IRS. And exchanges can report this information without approval from consumers. This is a tracking system for the IRS to gain insight into the taxes a citizen may owe on their personal cryptocurrency gains.
The assumption from most crypto investors is that cryptocurrency is untraceable, and their investments can remain anonymous. This is not true. With support from other agencies like INTERPOL and Europol, the IRS is becoming more advanced at globally tracing the transactions of digital currencies. For more information on how exchanges and cryptocurrency investors can comply with the IRS, visit our Cryptocurrency Tax Compliance page.
Exchange Compliance Registrations and Regulations
In some instances, cryptocurrency exchanges will be required to register with certain U.S. government entities if they meet specific guidelines. Some examples of government entities that exchanges may need to register and comply with are:
Why do I need legal guidance on exchange compliances?
Regulations on exchange compliance in relation to cyber security and anti-money laundering are continuing to evolve. More and more crypto exchanges are trending to voluntarily include fraud prevention processes. If your business runs a cryptocurrency exchange or you interact with a cryptocurrency exchange, particularly a fiat-to-crypto exchange, you want to protect your earnings and yourself from financial crime. At Blake Harris Law, we provide legal advice on how to either secure your cryptocurrency exchange business or your crypto assets in an exchange from potential financial crime as well as address the issue should you seek legal support in the instance of fraud.
Glossary of Important Terms
Here are some important terms to learn when it comes to exchange compliance: