By George Ward
FINRA’s Cautionary Insights
The US financial industry regulator, FINRA, has released its annual report for 2024, emphasizing the increasing risks and challenges associated with cryptocurrency investments. This report delves into various sectors but spotlights growing concerns regarding cryptocurrency.
One of the key takeaways from the report is FINRA’s warning to individuals considering crypto investments. It urged them to exercise extreme caution due to the prevalence of manipulative schemes in the crypto market.
Addressing Compliance Issues
Furthermore, FINRA’s report urges firms intending to engage in crypto-related activities to identify and address compliance challenges. The emphasis on regulatory adherence reflects the regulator’s concern about the risks associated with these assets.
Specifically, the report stresses the exploitation of low-market-cap crypto assets by malicious actors to perpetrate fraudulent activities. The report signals a growing trend of similar fraudulent practices in crypto as obtainable in traditional equity markets.
Incoherency Between Centralized And Decentralized Exchanges
According to the report, the regulator’s recognition of disparities between centralized and decentralized exchanges benefits malicious actors. The report highlights that the distinction in market structures may contribute to increased vulnerabilities and risks within the crypto ecosystem.
Additionally, Chainalysis, a leading blockchain analytics firm, recently highlighted prevalent phishing scams in the crypto industry. These scams involve deceiving victims into approving malicious blockchain transactions, underlining the vulnerabilities within the crypto space.
CFTC Report Flags Huge Risks In DeFi
Meanwhile, a recent report by the CFTC’s Digital Assets and Blockchain Technology Subcommittee revealed concerns about the burgeoning field of Decentralized Finance (DeFi). The report, spearheaded by CFTC Commissioner Christy Goldsmith Romero, highlights the lack of accountability and transparency within the DeFi space.
The report extensively outlines the risks associated with DeFi protocols, emphasizing their threats to consumer and investor protection, financial stability, and market integrity. It highlights the inherent vulnerabilities in certain DeFi systems, stating that the absence of clear responsibility and accountability is a significant concern.
Commissioner Romero stressed that the report’s primary objective is to foster dialogue between policymakers and industry leaders. Thus, there can be a well-informed and practical regulatory approach to address the complexities and challenges prevalent in the DeFi landscape.
Urgent Call For Collaborative Action
Central to the report’s findings is the urgent need for collaborative action between governments and industry stakeholders to comprehend and manage industry risks. Per the report, the lack of clear lines of responsibility and accountability within certain DeFi systems exposes the sector to potential illicit activities like cyber hacks and financial crimes.
The report recommends improving counter-terrorism financing (CFT) and anti-money laundering (AML) protections within the DeFi ecosystem. Also, it calls for assessments on identity information collection, identifying compliance gaps, and exploring regulatory measures to enhance identity information discoverability and verification.
Recommendations And Policy Responses
Furthermore, the report emphasizes the necessity of enhanced monitoring, data gathering, and regulatory assessment on an international scale. It stated that collaboration with domestic and international regulatory bodies and DeFi developers would be crucial for a harmonized regulatory approach to govern DeFi activities globally.
Moreover, the report identifies various risks inherent in DeFi, particularly liquidity mismatches and market manipulation. Hence, it proposes policies to mitigate these risks, such as regular regulatory reporting, disclosure requirements, third-party auditing, and regulatory supervision.