Updates to US regulations are critical for the country’s cryptocurrency industry, according to Zac Cohen, general manager of identity verification firm Trulioo, while Pete Hill, director at cryptocurrency mining software company Cudo Miner, believes a balance must be struck to avoid holding back innovation.

“Both from the regulators and operators in the market there is a real desire to update regulations and take into account new technology like cryptocurrency,” says Cohen. “I don’t think any business in crypto or otherwise wants to operate in an industry that doesn’t have trust from the consumer.”

“In the US there is a law system which will always try and take effective and quick action,” adds Cohen. “But you also have a lot of states which will take one action, while another state will do something else. Then you have the federal government, which can choose a third option.

“FinCEN’s decision to make its first sanction against a peer-to-peer virtual currency exchanger goes to show that US regulatory bodies are finally catching up with the rate of crypto innovation,” said Hill in an email, referring to actions taken by the US-based Financial Crimes Enforcement Network (FinCEN), which last week levelled its first civil penalty against an individual for operating as a peer-to-peer crypto exchange. Eric Powers, based in California, was charged by the regulator with “wilfully violating” the Bank Secrecy Act, and fined $35,000.

“There’s a balance to be struck between regulation and innovation,” added Hill. “Although it might seem counter-intuitive at first, sanctions like these need to happen if we are to encourage wider progress in the blockchain and crypto industries, and to deter bad actors from entering the market. Proper regulation is the only way that digital assets will become mainstream and accepted by wider society.

“The onus is now on crypto businesses to comply with existing regulation before additional ones are put in place. Crypto businesses also need to help guide and work collaboratively with regulators so that this exciting area of the financial sector is not held back by misguided legislation.”

Cohen adds: “When you ask, ‘should we improve or refine the rules that are governing these kinds of businesses?”, I think absolutely. It’s in the best interest of the business, in the best interest of the regulator, and in the best interest of the end consumer.”

In a press statement about the fine, FinCEN director Kenneth Blanco wrote: “There were indications that Powers was aware of these obligations, but wilfully failed to honor them. Such failures put our financial system and national security at risk and jeopardize the safety and well-being of our people, as well as undercut responsible innovation in the financial services space.”

According to FinCEN, Powers conducted more than 200 transactions of currency worth more than $10,000 but failed to file a currency transaction report (CTR). Powers also conducted 160 purchases totalling $5m in bitcoin via in-person cash transactions in public places.

Waking up

Under a set of guidelines issued by FinCEN in 2013, peer-to-peer exchanges are required to register as money services businesses (MSBs) and comply with the Bank Secrecy Act by registering with FinCEN as an MSB, submitting suspicious activity reports (SARs) on clients and filing CTRs. Both are required for applicable transactions over $2,000 and $10,000 respectively.

Although FinCEN registers and regulates MSBs, states remain the primary regulators of money transmitters, according to the Conference of State Bank Supervisors (CSBS). State laws vary across the US, with states such as Montana containing no laws on money transmission at all. In response, CSBS has established the Vision 2020 proposal, which aims to have all states jointly licencing and examine money transmitters.

For Cohen, occurrences like the FinCen fine are going to be a wake-up call for anyone who isn’t already aware of the where the cryptocurrency industry is headed. “I’m hoping that the fact the individual was an outlier in that he was aware of the obligations but chose to ignore them. I say that because what we see is that many virtual currency transmitters take anti-money laundering (AML) compliance and know your customer (KYC) very seriously.

“These are nascent technologies and are growing quite quickly,” adds Cohen. “Whenever you have a situation like that you can have hiccups along the way when you’re moving towards maturity of the process. When you think about AML and all the processes you have to go through it can be daunting for new entrants to have to deal with.

“I think the good news is for these organizations is that it doesn’t have to be painful. It doesn’t have to be a roadblock to success, when you understand that the right technology is there. Many of these crypto exchanges or alternative finance organizations are taking advantage of onboarding tools to stay compliant.”

A spokesperson for FinCEN declined to comment further on the matter.