Illustration: Aïda Amer/Axios
Crypto shops weary from last year's sequence of unfortunate events likely have strenuous regulatory calisthenics waiting for them, and executives see compliance costs rising across the board.
Why it matters: Regulators' hawkish stance on the industry signals a coming torrent of enforcement action — one that the major exchanges might be able to withstand, but that could choke out smaller firms, their products, or shrink the number of jurisdictions they operate in.
State of play: Larger exchanges are already building their own systems or expanding their compliance-dedicated headcount, even in the face of companywide layoffs.
Driving the news: Coinbase, the U.S.'s largest centralized crypto exchange, agreed to a $100 million settlement with New York state regulators last week over accusations that its failed to conduct sufficient background checks for new customer account applications.
Be smart: The crypto industry lacks a soup-to-nuts regulatory framework to adhere to, but it has been required to follow some rules.
Zoom in: Crypto exchange Kraken says it has increased its compliance headcount 55% over the past 12 months, even as the company cut staff in November.
Between the lines: Crypto exchanges use regulation technology to automate some of the processes of checking customer identities and transactions for suspicious activity in the same way banks and other traditional financial service firms do.
However, they also require teams of compliance experts who can also analyze and investigate transactions that occur on blockchains. And the need for these experts fluctuates based on the load of activity.
Meanwhile, in the wake of FTX's collapse and the rash of crypto lenders' filing for Chapter 11, the biggest crypto shops are trying to shore up or maintain a certain level of professionalism that shows their good standing.
No where to hide: "If there’s an enforcement action, it’s going to cost more than what you’re spending," Tim Byun, government relations officer for crypto exchange OKX, tells Axios.
The other side: Investment in compliance isn't immune to economic realities, however. There’s always a give-and-take in compliance resources, Jeff Horowitz, BitGo's chief compliance officer, tells Axios.
Reality check: Crypto firms that spent the most recent bull run launching new products and business lines willy-nilly — from the U.S. to Japan and everywhere in between — will have to reconsider, according to compliance officers.
Our thought bubble: Maybe the threat of enforcement cuts the industry fat.
