Distilled Analytics CEO on Crypto: ”A Lot of Manipulation” and No Protection

Dave Shrier speaks on regulation in the cryptocurrency space.

This is an excerpt. To hear the full interview with Dave Shrier, please click the Soundcloud or Youtube links.

Cryptocurrency regulation has been the most influential force in the industry in 2018. The libertarian attitudes that drove cryptocurrency forward in its earlier days are slowly being eliminated from the space as government regulators and policy makers tighten their grips on the blockchain industry.

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Finance Magnates spoke with Dave Shrier, founder and CEO of Distilled Analytics, about trends in regulatory compliance in the cryptocurrency industry. Dave is also a lecturer at MIT and an associate fellow at Oxford University.

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”The Crypto Industry Has Struggled” With KYC and AML “For a Long Time”

“The crypto space absolutely has a significant need for better AML/KYC (anti-money laundering/know your customer,” Dave said. “These are standard regulations in the industry that help govern compliance with law. The crypto industry has struggled with this for a long time.”

“New solutions are needed,” he continued, “so Distilled Analytics is building those solutions around AML/KYC. There’s certainly an opportunity to help within the crypto space, although we as a company are not directly involved in that area today.”

”Bitcoin is Regulated” Whether We Like it Or Not

“There are a couple of major issues. The first is that we say a couple of folks within the crypto space essentially seek to defy the laws of gravity. They say, ‘we’re building something new that’s outside of government control, and so it doesn’t have to comply with government regulation–that’s for old people’.”

“I’m paraphrasing, but not too much,” he continued. “I’ve had some pretty heated arguments with people operating in this sector because I say, ‘look, that’s fine if you’re not the citizen of any country and do business outside of the purview of any country on the planet, and that’s very difficult to do.’”

Dave explained that in order to remain out of the scope of regulation, a company would have to establish itself somewhere outside of the planet earth. “As soon as you start paying for goods or services, moving money into or taking money out of crypto technology into other forms of currency or money or goods or services, you now are in the scope or purview of government.”

Essentially, “whether (these people) like it or not, Bitcoin is regulated in a number of domiciles. There are just a lot of people who are not complying with regulations.”

Some Regulators Expect the Crypto Industry to Push Legal Boundaries

“This is not uncommon in any new technology adoption scheme,” Dave continued. “For example, according to reports that I’ve read, Uber knowingly violated a number of local taxi license requirements. Their strategy was ‘we’re gonna do things quickly and in some places fly under the radar so that we’ll get so big and essential that governments will be forced to change the regulations to let us operate.’”

“In the crypto space, several government regulators I have spoken to have expressed the philosophy that they like to see innovation happen around the edges, and they try to not intervene too early…and when it gets bigger, that’s when they step in to regulate it.”

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“What we’re seeing with Bitcoin is (that) it’s been regulated, but no enforcement has occurred. Now, enforcement is starting to occur.”

Regulators are Taking “Fairly Progressive” Approaches

“I’ve spent a lot of time talking to regulators policy makers, and among others, the OECD and the EU are trying to do what I consider to be fairly progressive approaches to thinking about crypto or blockchain, and trying to actually enable a new economy and not quash innovation.”

“The US is now starting to catch up and engage more thoughtfully around this area, which I find ironic because they’ve been thinking about this space for a very, very long time. I’ve worked closely with several treasury officials. They’ve been thoughtful about it, but I guess got distracted, and so the EU and the OECD are now leaning forward a bit more in how we build better risk management and compliance systems.”

Crypto Companies Don’t Comply with Governments and Don’t Follow Industry Security Practices

“So today, a lot of companies say that on the one hand, they don’t have to comply with any government regulation, and on the other hand, they don’t have a lot of the risk management controls in place that conventional institutions do.”

“So if you’re a bank, you’re a vendor to a bank, you typically have to comply with something called SOC2, which is a set of requirements around cybersecurity that ensure that your organization is complying with best practices.”

“A bunch of crypto companies just ignore that,” he explained. “And (when I say) crypto companies, I include wallets and exchanges. So we have seen some pretty substantial thefts and pretty overt breaches of crypto through weak cybersecurity. It’s particularly embarrassing when you see people who are themselves running security technology companies who do things like use an old password that’s been published already on password hack lists.”

”There’s a Lot of Manipulation That’s There’s no Protection Against”

Dave explained that good security practices come down to a few basic principles: “A), using basic cybersecurity practices in running your business is important. B) complying with a rigorous set of cyber risk management policies like SOC2 is important, but then C) we get into market and control risk.”

“A lot of crypto exchanges allow completely free flow of tokens. This means that unlike Nasdaq, or the NYSE, or Deutsche Borse, or the LSS, if there are wild fluctuations in price and clear price manipulation, the exchange has the ability to detect it and step in and intervene and freeze trading or unwind trading, or whatever is necessary to clean up the problem.”

“That doesn’t exist in the crypto exchange world to any meaningful degree, if at all. There’s kind of a libertarian view that it should not exist, but what it means is that it’s really hard to use this stuff to buy bread or pay your employees, because it’s so volatile. And based on what I understand from people who are insiders, there is a lot of manipulation going on that there’s no protection against, really.”

“I don’t mean that this is true for every cryptocurrency all the time,” he added, “but I have been told that there have been notable price movements that have been structured.”

To hear the full interview with Dave Shrier, please click the Soundcloud or Youtube links.

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