As the world moves to install regulatory guardrails for a growing digital assets industry, blockchain companies can ensure their own competitiveness and the long-term health of the industry by taking a compliance-first approach. Carolina Ceballos, chief compliance officer at blockchain infrastructure provider Paxos, shares practical tips for installing a compliance culture with the North Star of protecting the consumer.
The rise of digital assets and blockchain is arguably the most impactful technological change to happen to financial markets since the advent of mainframe computers. Yet, the fraudulent and irresponsible behavior that ushered in this crypto winter has painted an unseemly picture of the industry. In 2023, regulatory agencies and lawmakers have been convening committees, deliberating on various approaches and introducing bills to thwart the industry’s bad actors.
The financial sector is in the midst of a historic period of disruption headlined by the one-year anniversary of FTX’s implosion, Sam Bankman-Fried’s conviction and prison sentence and the complex risk landscape presented by the renewal of conflicts around the world, among numerous other factors. With that, the industry is highly motivated to earn the trust of retail consumers, VCs and institutional investors by demonstrating that digital assets bring enormous utility and benefits to the global financial system. We have observed companies moving much more methodically, asking many more risk and compliance-related questions and conducting deeper due diligence into when, how and with whom they enter the market. Ultimately, it’s all about protecting the consumer.
Keeping in mind that blockchain companies that build comprehensive, transparent compliance programs in the crypto space will be best positioned to achieve sustainable success, here are some best practices in designing compliance programs.
Prerequisite: Compliance leaders with strong moral character and resilience
It all begins with the people. Ensure that your compliance leadership embodies a strong moral compass and a commitment to doing the right thing, even when faced with challenging decisions, while maintaining effective cross-functional partnerships. That means appointing leaders who won’t tolerate dodgy crypto practices of lending off-platform, borrowing against customer funds or speculating. The compliance leader sets the tone for not only the compliance program but for the entirety of the business.
A compliance leader with a clear sense of ethics and an understanding of the breadth and depth of compliance ramifications will be the moral tentpole upon which the entire business grows. The compliant, regulated crypto companies with good risk management that care about their customers will distinguish themselves from the competition and strengthen the entire industry.
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Read moreDetailsEmployee well-being and value
The right leader will set an appropriate culture of compliance while prioritizing the well-being of the compliance team, recognizing the heightened scrutiny and stress often associated with crypto compliance. They’ll make employees feel valued by emphasizing the meaningful contributions they make to the organization’s success and reputation.
With so many questions regarding the future of crypto regulation, leadership should cultivate a zoom-in/zoom-out mindset, enabling teams to balance immediate priorities with a long-term vision for the compliance program. Encourage an obsession with continuous improvement and adaptation to the dynamic crypto landscape, including setting a high bar for compliance team training processes. Installing a culture of compliance is uniquely important for digital asset companies as the blockchain industry matures toward mainstream adoption.
Integrated blockchain compliance
The financial sector overall plays a vital role in thwarting bad actors and business malfeasance. Therefore, financial industry leaders are well aware of the importance of regulatory compliance across the business, but crypto entrepreneurs may not fully appreciate the cross-functional ramifications of staying compliant. For example, established neo-banks and fintechs must defend their digital asset business and custody products from skittish internal risk management, audit and finance teams. From a product innovation perspective, blockchain companies cannot risk rushing into any new product or service launches without first considering current and emerging regulatory expectations. To deter malicious actors from using crypto, it is essential for these companies to perform rigorous Know Your Customer (KYC) checks and closely monitor transactions for money laundering, terrorism financing and sanctions violations through blockchain analysis among other things. Every new product should be evaluated for its type and scope of risks so that all the right controls can be implemented. Inadequate compliance practices in crime prevention areas like KYC and AML are a direct detriment to customer experience and corporate reputation.
It is resource-intensive to build robust controls, but it’s a real, non-negotiable necessity. Startups looking to enter this market must meet increasingly high regulatory and security bars related to their plans for digital asset custody, while simultaneously aiming to build on a platform that future-proofs their digital asset business. But the benefits of blockchain can only be achieved if solutions are built within regulated frameworks, so compliance leaders cannot operate in silos and hope mistakes are not made in other departments.
Show, don’t tell to win hearts and minds
For a truly compliant culture to take root, the entire leadership team, as well as the investor partners and advisory board members must be engaged in a compelling way. As with most proof-points in financial services, the best way to deliver is by showing instead of telling using hard evidentiary data. I always emphasize the use of data, visual aids and compelling graphics in my compliance presentations.
A data-driven communication approach with critical thinking rather than passive observation is more likely to capture stakeholders’ buy-in and win hearts and minds. As clear digital asset regulation and compliance standards are developing, crypto companies — and the entire ecosystem — will be positioned to thrive by prioritizing the safety of customer assets. Staying ahead of regulators demonstrates good faith.
Competitive advantage through compliance
Elevated standards for compliance programs can help galvanize a fractured industry behind a steady drumbeat for needed improvements and less regulatory ambiguity. Recent failures may have also created a more efficient environment — with regulatory involvement — that will eventually help the digital asset economy to flourish. Clear regulation and robust compliance will foster consumer and institutional adoption by building confidence in markets, which attracts participation and brings liquidity and more long-term stability.
Carolina Ceballos is chief compliance officer at Paxos, a blockchain infrastructure provider. She has more than 15 years of experience in the field, having provided strategic leadership to teams responsible for developing, implementing and enhancing compliance programs at Facebook Payments (Meta) and Western Union, among others. She brings a deep knowledge of the international regulatory frameworks having served as a regulator with the French Supervisory Authority (ACPR). 
