Will regulation ruin crypto?

The crypto industry has emerged as one of the most transformative technological advancements of this century. In the financial industry, it has revolutionised the way we trade, invest and move money.

However, as regulatory requirements become increasingly stringent, questions arise: Will regulation lead to the collapse of crypto, or can it foster a more sustainable and secure ecosystem?

Traditional finance and crypto: An increasingly intertwined relationship

When Satoshi Nakamoto introduced Bitcoin in 2008, he envisioned a decentralised, peer-to-peer electronic cash system. Initially, many users managed their crypto wallets independently (known as self-custody or non-custodial wallets). Fast forward to today, and the landscape has changed drastically. People tend to store and transact their cryptocurrencies through intermediary exchanges, which are regulated financial service providers. These exchanges are the necessary intersection between fiat currencies and crypto assets.

In a way, regulatory compliance has brought crypto into the fold of the traditional financial system.

Why is crypto regulation necessary?

Despite innovations such as faster and cheaper money transfers, the crypto industry has faced criticism and scrutiny. Criminal activities, including money laundering and ransomware attacks, have exploited the anonymity and decentralised nature of cryptocurrencies. This has prompted calls for robust regulatory oversight.

Governments, regulatory bodies and financial institutions around the world are grappling with how to oversee the crypto industry without stifling its potential.

Some key reasons for the regulation of crypto include:

1. Consumer protection: The volatile nature of cryptocurrencies can lead to significant financial losses for investors. Regulatory frameworks can help protect consumers from illegal activities such as fraud, scams and ransomware attacks.
2. Risk mitigation: Cryptocurrencies have been used for black-market transactions, money laundering, market manipulation, and even human trafficking. Compliance with Anti-Money Laundering (AML), Know Your Customer (KYC), and Counter-Terrorist Financing (CTF) regulations can help mitigate these risks.
3. Tax compliance: Clear guidelines on the taxation of crypto assets are necessary to ensure compliance and revenue collection.
4. Market integrity: Regulations can help create a fair and transparent market, reducing the risk of manipulation and increasing investor confidence.

Key regulatory developments

One of the most significant regulatory measures affecting the crypto space is the Financial Action Task Force’s (FATF’s) Recommendation 16, which includes the “travel rule.” This rule requires exchanges to know the source, destination and validity of funds for every transaction.

By 30 April 2025, all Crypto Asset Service Providers (CASPs) in South Africa will need to implement Directive 9 in terms of section 43A(2) of the Financial Intelligence Centre Act (FIC Act). This directive mandates that CASPs provide secure information on the originators and beneficiaries of crypto asset transactions.

According to the FIC’s media release on 15 November 2024: “CASP accountable institutions are obliged to provide in a secure manner information on the originators and beneficiaries of crypto asset transactions to beneficiary institutions. The obligation is for the originator CASPs to do this immediately, i.e., prior to or simultaneously with the transfer of the crypto assets.”

In addition to the travel rule, compliance requirements now include on-chain analysis, Politically Exposed Persons (PEP) and sanctions screening, and source-of-funds checks — similar to the compliance measures used by traditional banks.

How crypto regulation affects Xago customers

Xago’s Compliance team conducts rigorous KYC (Know Your Customer) and KYB (Know Your Business) checks on all customers, both individuals and businesses, before approving accounts and enabling transactions. These checks adhere to a risk-based approach and include verifying each customer’s identity and address, as well as reviewing all required documents.

The team also monitors transactions and may perform enhanced due diligence for customers presenting a higher risk. In such cases, customers may be contacted for further information. Additionally, with the travel rule coming into effect, Xago will be obligated to send and receive specific information for every transaction — but it is worth noting that this regulatory requirement will not impact the time it takes to approve a transaction.

Is there still a use case for crypto?

The answer is a resounding “Yes!”

Beyond meme coins, NFTs and speculative trading, crypto addresses real-world financial challenges:

1. Alternative transaction methods: Crypto platforms offer alternative payment rails, enabling new and innovative ways of transacting.
2. Addressing liquidity issues: Liquidity challenges in Africa have led banks to restrict USD transfers, opening doors for crypto as an alternative.
3. Stablecoins: These digital assets, designed to maintain stable value, offer a reliable solution for instant transfers across Africa and help hedge against currency fluctuations. Hedging against currency devaluation by USD-based stablecoins has become common practice in Africa.

Conclusion

While regulation may seem like a threat to the crypto industry, it could pave the way for a more secure, transparent and sustainable ecosystem. By addressing risks and ensuring consumer protection, regulation can help the industry mature and gain broader acceptance.

US President Donald Trump has promised to ease regulations on crypto. Regardless of how that scenario unfolds, one thing is clear: Crypto is here to stay. Even with increasing regulation, crypto remains highly relevant, solving major financial challenges for businesses and individuals alike.

Find out more about stablecoins.

Disclaimer: Always conduct extensive research before investing in or using cryptocurrency for financial transactions. Understanding the associated risks and benefits is crucial when exploring alternatives to traditional banking.