Crypto Scams Plaguing the Industry – How Important Is Crypto Regulation?

• Australia's HSBC (one of the country's largest banks) blocked app payments to crypto exchanges because of numerous recent scams. Australians lost $171M in crypto scams in 2023.
• WazirX blames Liminal, its wallet provider, for the $235M hack suffered on July 18. Liminal fights back, claiming the vulnerability originated with WazirX.
• Coinbase received a $4.5M fine from the UK's Financial Conduct Authority (FCA) for serving high-risk customers' despite claiming in 2020 it wouldn't before improving its anti-money laundering procedures.
• Crypto regulations may end up doing more harm than good in their attempt to mitigate scams and illicit crypto transactions.

Scams have always plagued the crypto industry, but recent events had hefty consequences. Australia's HSBC blocked all payments to crypto exchanges, limiting Australians' investment opportunities.

WazirX's $235M data breach and Coinbase's $4.5M fine for serving high-risk customers' have also added to fear, uncertainty, and doubt (FUD).

This raises the issue of crypto regulations and whether they could prevent scams and safeguard investor funds.

Consumer protections, such as anti-money laundering procedures, KYC, and risk disclosures, are crucial in ensuring safe and secure crypto transactions.

But can too much regulation stifle the industry's growth, and are there downsides we should consider?

Let's explore the recent scams and regulatory issues to see what's wrong and what can be done.

Coinbase Gets $4.5M Fine for Allowing Risky Customers to Buy Crypto

The UK's FCA fined CB Payments Limited (CBPL), a part of Coinbase, $4.5M after the exchange allowed high-risk customers' to buy crypto.

An X user hinted at a potential reason for this: Coinbase's promise in 2020 not to take new high-risk clients before improving its anti-money laundering procedures.

UK FINES COINBASE PAYMENTS $4.5 MILLION

The UK Financial Conduct Authority issued the fine for their failure to guard against financial crime.

After the FCA inspected Coinbase Payments in 2020, they agreed not to take on any new high-risk clients until they improved their... pic.twitter.com/4NcUgpjNW2

- Mario Nawfal (@MarioNawfal) July 25, 2024

According to the FCA, Coinbase served 13,416 high-risk clients, of whom 31% deposited ~$24.9M and transacted over $226M.

Therese Chambers, the FCA's joint Executive Director of enforcement and market oversight, confirmed money laundering risks as the main reason for the fine.

The money laundering risks associated with crypto are obvious and firms must take them seriously. CBPL's controls had significant weaknesses and the FCA told it so, which is why the requirements were needed. CPBL, however, repeatedly breached those requirements [and the weaknesses] increased the risk that criminals could use CBPL to launder the proceeds of crime.Therese Chambers

According to Chambers, as it is the biggest crypto exchange in the US, Coinbase should set an example regarding money laundering regulations.

WazirX Breach & Australian Crypto Payment Blocks Spell Misfortune

The $235M WazirX data breach on July 18 came to a head as the company stated the vulnerability wasn't their fault. Instead, they blamed Liminal, their wallet provider.

Conversely, Liminal denied these claims and fired back, stating that their platform is secure and fully operational. In a July 19 report, they suggested the attack had compromised three of WazirX's devices.

The attack took the crypto community by surprise and lowered trust in third-party infrastructure for securing crypto.

In the same period, Australia's HSBC started blocking crypto transactions because of the recent spate of scams in the country.

From 24 July 2024, HSBC will block payments from bank accounts and credit cards that we reasonably believe are being made to cryptocurrency exchanges, for your protection. [...] If you wish to make payments to cryptocurrency exchanges, you'll need to make alternative arrangements.Therese Chambers

Australianslost ~$171M in crypto investment scams in 2023, prompting four of Australia's largest banks (Commonwealth Bank, Westpac, New Zealand Banking Group, and National Australia Bank) to restrict payments to crypto exchanges in the same year.

However, Amy-Rose Goodey, Managing Director of the Digital Economy Council of Australia, said the move reflects a concerning trend' of crypto restrictions.

Goodey emphasizes that many Australians will lose the financial right' to participate in the crypto ecosystem, and it'd be better to establish clear, fair and forward-thinking regulations' to avoid crypto scams without crippling innovation.

Verdict - Are Crypto Regulations Good?

On the one hand, anti-money laundering regulations and consumer protection laws are necessary to ensure a fair and secure trading environment. WazirX's hack shows what could happen without proper regulations in place.

On the other hand,too many regulations can stifle progress. Crypto is one of the most innovative industries in the world, and it needs a certain degree of liberty and independence to grow.

Lawmakers should be wary of over-regulating crypto transactions to mitigate scams. The drawbacks may outweigh the benefits.

References

• Update on WazirX Incident (Liminal Custody)

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