Introduction
Blockchain has found increasingly more use cases in several industries over the last fifteen years, proving its potential as a legitimate transformative technology.
In the financial services industry, blockchain is the backbone underpinning cryptocurrency development and smart contract execution on an immutable ledger environment. Beyond finance, blockchain's decentralized ledgers have become indispensable tools, bringing disintermediation in health and supply chain domains.
This growing adoption has prompted regulatory intervention, with governments worldwide exploring suitable ways to govern activities, operations, and products built on blockchain technology.
This year, the regulatory spotlight has been on the Markets in Crypto-Assets Regulation, which comes into full effect on December 30, 2024. Other relevant legislative pieces with upcoming key compliance dates are the Digital Operational Resilience Act and the Transfer of Funds Regulation.
Looking ahead, 2025 is poised to be a defining year for blockchain technology from a regulatory compliance perspective. This blog is a comprehensive guide for stakeholders and observers alike on the importance of blockchain regulatory compliance, current regulatory frameworks, and best practices to achieve compliance.
Overview of Blockchain Regulatory Compliance
What is Blockchain Regulatory Compliance?
Compliance pertains to the observance of regulatory frameworks and legal rules established by government or intergovernmental bodies to guide processes or systems. In the blockchain context, compliance entails fulfilling relevant requirements and standards implemented by regulatory authorities, government agencies, and organizations.
The notable areas of compliance are:
AML controls
Anti-money laundering (AML) measures seek to thwart the misuse of blockchain-based systems or assets to facilitate illicit financial transactions, specifically money laundering and terrorist financing. Requirements pertaining to AML include monitoring transactions and reporting suspicious activity.
KYC standards
Know-your-customer (KYC) guidelines require platforms and systems to apply identity verification checks in their onboarding process to enhance security.
Safeguarding User Assets
Protecting user assets is a cornerstone of regulatory compliance in the crypto space. For instance, many regulations require Crypto-Asset Service Providers (CASPs) to implement measures such as asset segregation, which separates user holdings from company assets to protect customer funds in cases of insolvency.
Securing Crypto Infrastructure
A secure infrastructure is essential for sustaining operations and maintaining compliance in the crypto sector. Robust platform security measures, including real-time monitoring and advanced risk management systems, shield platforms from potential threats.
Data privacy and protection rules
Data protection laws like the General Data Protection Regulation (GDPR) constitute another compliance area. Blockchain businesses that process the personal data of European Union (EU) residents may be subject to these rules governing data collection, storage, and transfer.
Securities law
In some jurisdictions, blockchain-based products and services may be recognized and classified in scopes under specific financial market rules.
The role of compliance in blockchain projects
Compliance with stipulated provisions and directives is key to building credibility and trust between stakeholders in any industry. This principle holds for the Web3 space.
Regulatory compliance demonstrates integrity and a commitment to responsible innovation, ultimately contributing to a legitimate operating environment.
Compliance is also important in preserving the reputation of blockchain projects and the development teams behind them. Not least, compliance prevents blockchain legal issues and, by extension, penalties arising from violation or non-adherence.
Key Blockchain Regulatory Frameworks in 2025
Global Regulatory Bodies & Their Frameworks
Financial Action Task Force guidelines for AML and On-chain Monitoring
The Financial Action Task Force is the primary international authority on money laundering and terrorist financing. The FATF provides non-legal guidance that countries and national systems must follow to design their regulatory frameworks.
This guidance is stipulated in the form of 40 recommendations on money laundering and 9 recommendations on terrorist financing. They include preventive measures such as customer due diligence (Recommendation 10), record-keeping of customer information (Recommendation 11), and AML/CFT controls (Recommendation 15).
The FATF recognizes that each country has its legal and financial system, which may differ in enforcement mechanisms and effectiveness. As such, it doesn’t demand implementation in a fixed and one-size-fits-all manner. Instead, the FATF specifies minimum standards to be upheld, with a focus on meeting the underlying objectives.
European Union’s Markets in Crypto-Assets
Markets in Crypto-Assets (MiCA) represent the EU’s legislative efforts to uniformize the regulation of digital assets in the region. MiCA regulations, passed in April 2023 by the European Parliament, seek to standardize the guidelines for the classification, issuance, and trading of digital assets across member countries.
The regulatory framework targets entities that provide services tied to or involving crypto assets. MiCA introduces some AML/KYC principles, but its guidance isn’t as comprehensive as FATF recommendations. Certain provisions of MiCA on licensing and stablecoin issuance are already live, but the bulk of requirements are pending implementation later this year.
U.S. FinCEN requirements for blockchain-related businesses
The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of the Treasury established to support efforts to fight money laundering and the financing of terrorism.
FinCEN outlines obligations for domestic financial institutions and foreign entities that act as counterparties in transactions involving the U.S. financial system. These include sanction compliance, record keeping, and adopting AML/KYC measures.
Regional Differences in Blockchain Compliance
Contrast between the EU, U.S., and Asia
Authorities in different jurisdictions have adopted diverse approaches and imposed different rules with respect to blockchain regulation.
Europe
The recently introduced MiCA regulations highlight a harmonized approach to blockchain regulation by standardizing regulatory principles in the EU region. While MiCA has stood out as the most cohesive crypto regulatory regime so far, it is not the sole European-level framework that blockchain businesses should consider.
The Digital Operational Resilience Act (DORA) will take effect on January 17, 2025. The Act’s broader scope covers European financial institutions, and its requirements focus on managing information and communication technologies risk.
Middle East
Since its launch in 2015, the Abu Dhabi Global Market (ADGM) has been a fintech, digital asset and cryptocurrency powerhouse for innovation and business growth. Adopted under English common law, the ADGM provides financial institutions with a robust level of regulatory compliance and protection. Regulators are:
- Registration Authority (RA)
- Financial Services Regulatory Authority (FSRA)
- ADGM Courts which regulate licensing, financial activity and litigation.
In 2024, Abu Dhabi Global Market (ADGM) and Hacken have partnered to set new benchmarks in blockchain security and compliance. This collaboration aims to establish world-class standards through joint efforts in security and compliance development, advanced DLT foundation monitoring, and AI-enhanced monitoring solutions.
Asia
In Asia, regulatory approaches are analogous for some countries and divergent in others.
Mainland China enforces strict regulations and limitations on blockchain-related activities like crypto trading.
Conversely, Hong Kong is slightly receptive and embraces a principles-based regulatory approach. The Hong Kong Monetary Authority relies on a regulatory sandbox model to promote innovation in financial services and products under relaxed regulations. The central banking institution has also prescribed anti-money laundering and counter-terrorist financing (AML/CFT) guidelines.
In Singapore, the Monetary Authority of Singapore practices oversight on digital asset custody, cross-border payments, and token transfers through the Payment Services Act. The Act recognizes digital currencies as digital payment tokens and provides guidance on their issuance and trading. In April 2022, the Singapore Parliament passed the Financial Services and Markets Act (FSMA), which sought to “enhance the MAS’ agility and effectiveness.” Singapore has also adopted a regulatory sandbox framework.
The Financial Service Agency provides regulatory guidance and ensures adherence to requirements in Japan. The Payment Services Act provides rules and other measures for crypto asset exchange services and fund transfer businesses. In addition, self-regulatory organizations play a role in monitoring compliance with the Japan Security Token Offering Association and Japan Virtual Currency Exchange Association, formally recognized in this regard. Japan, however, lacks an omnibus regulatory framework like the FSMA to govern blockchain-based token offerings.
The Bangko Sentral ng Pilipinas issues and administers the regulatory framework in the Philippines. The central bank ensures virtual currency exchanges operate in conformance with its guidelines, which include AML/CFT and data protection rules. Like Singapore, the Philippine government supports regulatory sandboxes and instituted the BSP's regulatory sandbox framework in 2019.
The U.S.
In the US, the conversation around the Financial Innovation and Technology for the 21st Century Act (FIT21) will drag into next year. The Financial Innovation and Technology Act—a product of joint efforts by stakeholders, including legislators and financial institutions—represents a positive step towards establishing the regulatory roles and boundaries of bodies involved in oversight capacity.
FIT 21 was tabled in the U.S. House of Representatives in July 2023 and passed in May 2024. As of September 2024, the bill had been received in the Senate and referred to the Committee on Banking, Housing, and Urban Affairs.
Challenges of Blockchain Regulatory Compliance
Blockchain Regulatory Issues and Legal Barriers
The fast-evolving nature of blockchain technology has created a regulatory compliance dynamic that demands constant adaptation. Regulatory requirements are often amended and updated to keep up with shifting targets, which presents a difficulty for companies and projects targeting compliance in several markets.
Complexity of Cross-Border Transactions
Blockchain regulatory compliance entails observing the requirements of jurisdictional laws, global standards, industry association rules, and specific use-case guidelines. The cross-border nature of blockchain transactions adds nuances and intricacies to the process of compliance with all applicable requirements in different jurisdictions.
Some requirements can also be unclear or contradictory, complicating the compliance process. Even where international or globally standardized regulatory frameworks are implemented, their practical application might vary on a country-by-country basis.
Ambiguity in Crypto Asset Classifications
The classification of crypto assets has been a contentious issue for some time. Despite efforts to address it, there remains confusion among market participants. The resulting uncertainty has made compliance difficult and sometimes led to legal disputes between regulators, brokerage firms, investors, and consumers. The U.S. SEC’s lawsuit against Ripple Labs in 2020 best highlights this legal polarization.
Challenges for Blockchain Privacy and Compliance
Balancing Privacy with Transparency
Blockchain-based systems have transformed the financial service industry by reducing settlement times and providing auditable transaction records within the limitations of the blockchain's design. This transparency conflicts with historical reliance on trusted intermediaries and has raised privacy concerns.
Impacts of GDPR and Similar Regulations on Blockchain Privacy
Data protection regulations like GDPR mandate platform providers to protect user data. However, blockchain’s inherent transparent design overlaps with these requirements. Reconciling this incongruity and striking a compliant balance necessitates substantial effort and novel strategies.
Technical and Operational Limitations of Blockchain Compliance
Complexity and Scalability Issues
The decentralized architecture and features of blockchains, like cryptographic protocols, complicate integrations with compliance solutions.
In addition, some blockchains have scalability limitations that can hinder the proper implementation of compliance checks. For instance, network congestion can lead to delayed transaction confirmations, which in turn impedes real-time monitoring and analysis of transactions.
Cost of Maintaining Compliance Programs
Blockchain regulatory compliance involves regular audits, AML/KYC programs, and licensure, which can be expensive. Ongoing maintenance expenses and other compliance-related investments in personnel and infrastructure can significantly increase the costs incurred.
Best Practices for Achieving Blockchain Regulatory Compliance
Regulatory compliance is ineluctable for organizations and platforms that leverage blockchain technology. Recognizing this, planning for and ensuring compliance where regulatory regimes are in effect is prudent.
The first step in navigating the complex blockchain regulatory landscape is understanding the historical context of implemented rules and standards. This entails reviewing the particular frameworks in question, their scope of applicability, how they have changed over time and their interpretations.
Proactive Compliance Strategies
Engage with Regulators Early
Stakeholders should strive to actively engage each other at the earliest opportunity to address arising concerns with time to spare. Cultivating a positive regulatory relationship also well-positions stakeholders to contribute to formulating guidelines with a forward-thinking mindset.
Conduct Regular Audits and On-Chain Monitoring
Blockchain businesses are, at minimum, expected to maintain the ability to identify and mitigate financial crime risks impacting their services or products. This is why conducting audits and monitoring transactions is important to identify potential risks like security vulnerabilities and smart contract flaws.
Leveraging Blockchain Compliance Companies
Compliance solution providers offer tools and services tailored to help businesses satisfy regulatory requirements and stay compliant. These solutions have different compliance features, regulatory coverage, target users, and pricing; hence, there is a need to evaluate them carefully against specific compliance needs. Some leading blockchain analytics and compliance providers are Hacken Extractor, Elliptic, Chainalysis, CipherTrace, and TRM Labs.
Blockchain Regulatory Compliance Tools and Technology
On-Chain Monitoring and Security Compliance
Monitoring transactions enables blockchain businesses, such as virtual asset service providers, to track the movement of virtual assets and analyze patterns.
On the other hand, conducting rigorous risk assessments and implementing robust security measures helps mitigate non-compliance risk and potential legal repercussions.
Tools and Strategies mandated by FATF and EU directives
Some regulatory frameworks, including FATF recommendations and the EU’s Fifth Anti-Money Laundering Directive, indirectly encourage the adoption of monitoring tools and analytical solutions that help execute compliance strategies.
On-Chain Monitoring Tools
Compliance monitoring solutions are designed to screen transactions or wallets, flag potential risks, and generate reports for compliance purposes. Blockchain projects can use these tools to execute compliance strategies.
Hacken Extractor is one such powerful solution equipped to support blockchain projects and regulators in strengthening their security posture and streamlining compliance efforts. Its capabilities include advanced 24/7 real-time monitoring, AI-enabled alerts on potential attacks, and built-in protection mechanisms through predefined response plans.
Hacken Extractor’s user-friendly and self-service platform also provides customizable protection features to meet specific needs. In this way, Hacken Extractor is a necessary compliance solution through which blockchain projects can stay ahead of evolving regulations and prevent legal liabilities.
Chainalysis and Elliptic also provide robust crypto compliance solutions, including transaction monitoring, forensic investigation, and wallet screening tools.
Blockchain Security Enhancements
Strong encryption techniques, secure wallets, and regular security audits can streamline compliance, helping satisfy regulatory expectations. Faster incident management through rapid detection and timely intervention can limit risks arising from cyber threats or network issues.
Future Trends in Blockchain Regulatory Compliance
The blockchain regulatory landscape is constantly evolving, thanks to continued niche innovations and advancement.
Evolution of Blockchain Law
Blockchain use cases in other Web3 sectors, such as decentralized finance (DeFi) and non-fungible tokens (NFTs), have appealed to and drawn more users. The growing popularity of these use cases has elevated blockchain to the forefront of global market discussions. Consequently, more legal frameworks are likely to emerge targeting these innovations.
Predictions for Regulatory Changes in Significant Regions
The U.S. has been criticized for lacking regulatory consistency while imposing an aggressive enforcement strategy. An October 2024 insights report from the World Economic Forum (WEF) concluded that this pursuit of regulation without sufficient guidance has been detrimental.
This could, however, change under the incoming administration led by President-elect Trump. At the Bitcoin 2024 Conference in July, Trump said he would establish a new council to advise on crypto policy if re-elected.
There are elevated expectations for well-defined and progressive regulations under a Trump presidency. Perhaps indicative of this, SEC chairman Gary Gensler communicated his resignation this month and will leave office in January.
Trump’s administration, which includes some crypto-friendly nominees and appointees, could also institute the first White House crypto role dedicated to digital asset policy and regulation, per a November 20 Bloomberg report. In addition, the US may also consider establishing regulatory sandboxes to promote the development of blockchain technology.
Various pieces of legislation have been introduced in other countries and are at different stages.
This month, the UK affirmed plans to progress with its all-encompassing regulatory framework for crypto assets, including stablecoins, in early 2025. The draft legislation was delayed by the July elections, which saw the opposition Labour Party come into government.
In Australia, the Treasury published a proposal paper seeking feedback on a framework constituting the licensing and custody principles for digital asset service providers in October 2023. The scope of this proposed regulatory framework was updated in June 2024 to include a framework for governing stablecoins.
Technological Innovations Supporting Compliance
Advances in blockchain technology necessitate regulatory frameworks that can keep up with the changes. Emerging technologies and solutions have shown promise in enhancing compliance by automating tasks and improving risk assessments through predictive analysis.
AI and Machine Learning for Predictive Monitoring
Artificial Intelligence, more so machine learning, has unlocked better compliance management techniques in the face of a growing volume of regulatory expectations as well as risks. AI tools have addressed the limitations in manual compliance operations thanks to their ability to handle large data and quickly process texts.
The role of AI in supporting compliance yields several benefits, such as automated due diligence and real-time detection of risks or oversight that could lead to compliance. In addition to expediting and improving the accuracy of compliance tasks, AI can also help manage the cost of compliance by reducing operational costs.
Decentralized Identity Solutions for Seamless KYC
Decentralized identity solutions provide an alternative approach to implementing Know-Your-Customer (KYC) controls.
Under this type of digital identity management, users initiate the process of obtaining verifiable credentials (VCs) using their digital wallets by creating digital identities and generating public-private key pairs. Trust issuers, upon receiving the request, verify the user's identity and generate a VC, which is sent to the user.
Decentralized identity solutions integrating blockchain have the potential to streamline Know Your Customer (KYC) checks. Blockchain's immutable ledgers can store records of credential issuance and transfers, providing transparency and enhancing security. These blockchain-based decentralized solutions can integrate smart contracts programmed to automate verification processes, further enhancing their functionality.
Conclusion: Building a Compliant Blockchain Ecosystem
Compliance is an ongoing act, not a one-time event. Keeping this in mind, blockchain businesses must work around regulatory complexities by embracing the best strategies to achieve compliance and secure a strong position in the market.
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