Regardless of how far away state is from developing regulatory frameworks like those being considered in California, we should be preparing your business for the inevitability of state regulation.
If you’re an entrepreneur in the cryptocurrency industry, the most important thing you can do to prepare is to demonstrate to regulators that you share consumer protection as a broad value and institutional goal.
Bringing your financial institution in-line with that goal will require some thoughtful work, but fortunately, the most effective changes you can make are largely practical and simple to implement.
Here are six things you can do to show regulators you take consumer protection seriously.
1. Transparent disclosures
Consumer protection and good customer service go hand-in-hand (plus, it just makes good business sense).
2. Aiding in consumer awareness efforts
As your business becomes aware of scam activity spreading in the cryptocurrency marketplace, your efforts to educate your customers and keep them safe do not go unnoticed by regulators.
Informing your customers of potential scam activity in the form of Craiglist scams, crypto romance scams, or other nascent archetypes shows that you are a collaborative partner in consumer protection.
3. Protecting customers aged 60+
Elder financial exploitation (EFE) is a significant problem in every corner of the financial system, and cryptocurrency is no exception. There are a number of methods cryptocurrency businesses can use to detect potential EFE, starting with requiring a government-issued identification with every transaction.
If you notice that a customer is aged 60 or greater, conduct additional due diligence to ensure they are not the victim of a financial scam.
4. Maintain detailed red flags to catch potentially suspicious activity
A comprehensive list of red flags unique to your institution is a must, but you must also vigilantly test transactions against them. This can be tricky in cryptocurrency, because there are new adopters every day, so signs of potentially suspicious activity might also simply be innocent naivete from a customer doing a transaction for the very first time.
How can you tell the difference? Conduct stronger customer due diligence. Ascertain whether the customer is open to answering your KYC/CDD questions. If the customer is resistant to such information gathering or attempts to abort a transaction prematurely, or appears nervous, these might be signs of suspicious activity that require reporting.
5. Limits for first-timer customers
On that note, first-time customers might be unfamiliar with reporting requirements and attempt to execute a large transaction or break a large amount into smaller transactions for completely innocent reasons.
The problem for you is that you don’t know whether a first-time customer is simply naive, or if they are a financial criminal seeking to exploit your business.
That’s why, regardless of the customer’s motive, you should enforce first-time customer limits. Consider “cooling-off” periods before the customer can transact again, or limits on the amount they can transact.
6. Logging customer complaints
Like we said in point #1, consumer protection and good customer service go hand-in-hand.
The ability to show regulators that you take customer complaints seriously is a big sign of positive cooperation with consumer protection goals.
The good news is that consumer complaints can be kept in a simple spreadsheet, with pertinent information like name, the nature of the complaint, when it was logged, and any remediation actions your institution took.
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