Introduction to Crypto Regulation and Compliance
The world of cryptocurrency is complex and ever-evolving, with regulatory compliance being a key aspect of the industry. However, compliance does not necessarily guarantee the security of a project. In fact, a project can spend $500,000 on legal opinions, have a fully doxxed team, and pass every AML audit in Singapore, yet still go to zero in twelve seconds due to a calculation error on line 40 of its smart contract. This highlights the reality of modern crypto regulation and compliance, where regulatory compliance keeps bad actors out, but doesn’t protect against operational failures, supply chain attacks, and technical incompetence that can exhaust a project in seconds.
Understanding Regulatory Compliance
Regulatory compliance is aimed at catching criminals and bringing projects into regulatory territory, not at preventing mistakes. The industry treats compliance like a security seal, even as it ignores the biggest risk areas, such as key management, supplier security, and execution errors, that account for the majority of major losses. Different jurisdictions have built different types of Maginot Lines, protecting against risks from the outset, including money laundering, market manipulation, and misuse of customer funds. However, the regulatory situation in various legal systems is quite fragmented, and not every regulatory authority offers standards that can be met in practice.
The Limitations of Compliance
Compliance brings traditional market rules to the crypto world, but does not make the compliant project invulnerable. Even if a project follows every AML rule, it can still go bankrupt or get hacked due to poor key management. The EU Digital Operational Resilience Act (DORA) requires financial firms to vet third-party providers and closely monitor their security posture, but these are governance controls, not execution blocks. A supply chain attack can cause a scripted outflow of funds or data in seconds, much faster than any compliance audit or quarterly review can detect.
Compliance as a Marketing Tool
The industry is currently stuck with compliance as a marketing tool, where a KYC badge is treated like a security certificate. However, knowing the CEO’s name doesn’t matter if the protocol has no brakes. Regulators tick boxes, such as risk mitigation plans and dependency risks revealed, but this box-ticking approach is wrong. Compliance is aimed at catching criminals, not at preventing mistakes. And in the crypto space, incompetence destroys more capital than malice ever could.
The Reality of Losses in Crypto
In 2024, established, compliant companies, centralized exchanges, and infrastructure projects with legal entities and doxxed teams suffered twice as many losses as decentralized protocols. Fully compliant exchanges, such as Japan’s DMM Bitcoin and India’s CoinDCX and WazirX, suffered half a billion dollars in losses due to operational negligence. The reason for the failure was the same for all of them: a supply chain attack with malware. This describes the whole problem: we check the math while ignoring the manager and the largest risk surface.
The Need for Self-Regulation
The blockchain industry needs to regulate itself, using a common “probability of loss” framework that gives everyone a common language for risk assessment. This metric covers what compliance ignores: reality. It addresses treasury diversification, access controls, and code quality, measuring the actual structural condition of a project, which indicates its likelihood of survival. Hacken is currently developing a self-regulation platform that aims to close the trust gap in the Web3 economy, introducing the Probability of Loss (PoL) metric as a “credit score” for web3.
The New Due Diligence
The industry’s trust model is currently broken, with social signals, such as the support of KOLs, big-name backers, and the false comfort of a regulatory license, being used as wrappers that say nothing about the structural integrity of the product they contain. The question is no longer, “Are they licensed?” or “Who supports them?” but “What are the chances of them failing?” The market needs to start pricing risk based on harsh reality, not regulatory theatrics.
This is Budorin, Co-Founder and Chief Executive Officer of Hacken, a cybersecurity expert and cryptoeconomics influencer with over 14 years of management experience in cybersecurity and risk and controls audits. He is also Vice President of the Blockchain Association of Ukraine and co-chair of EEA DRAMA, a DeFi risk assessment management and accounting group of the Enterprise Ethereum Alliance.
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