BitFlyer Chief Compliance Officer On The Current State Of Crypto Regulation In The United States

CryptoSlate recently had the opportunity to chat with David Zacks, the Chief Compliance Officer of bitFlyer USA on the current state of crypto regulation in the United States.

In his role at bitFlyer, David leads Risk, Compliance, Legal, and Regulatory Affairs. Prior to joining Bitflyer USA, David held various Compliance management roles at Airbnb, Auka, JP Morgan Chase and Yapstone. He also served as the Liaison to Mexico at the Financial Crimes Enforcement Network (FinCEN).

Throughout his career, David has set up compliance programs, led investigative teams, navigated complex sanctions regimes, expanded global licensing, and provided executive oversight. David has a B.A. degree from California Lutheran University in Political Science and International Studies, and an M.A. degree from the Middlebury Institute of International Studies in International Policy Studies. He is a Certified Anti-Money Laundering Specialist and a Certified Financial Crime Specialist.

The US Government have been cracking down on unregulated crypto exchanges left and right lately. Do you think we’ll start seeing more traders make the jump to platforms like bitFlyer in 2021?

It may seem like there is a crackdown going on, but really these investigations have probably been years in the making. Nonetheless, it’s an indication that regulators are keeping an eye on crypto and are taking action against those who flout regulations or deceive the government. Traders will doubtlessly make the jump as unregulated exchanges are caught. I don’t see this being an immediate phenomenon, but I expect it in the medium term. Overall regulatory actions by enforcement agencies are actually down.

For example, on average, the Office of Foreign Assets Control “OFAC” under the Trump/Pence administration has issued 35% fewer enforcement actions and collected 25% less in punitive damages per year than during the Obama/Biden administration. This equates to almost a $500M difference in punitive damages collected during the course of the Trump administration. It is fair to assume that enforcement actions and punitive damages will increase in a Biden/Harris administration.

As such, it would be prudent for crypto exchanges to redouble their efforts in adhering to applicable regulations. Like I mentioned, if this is the trend and enforcement increases in this next administration, then yes I expect to see more traders make the jump.

The exchange market has been put through a loop lately, with top dogs such as BitMEX getting hunted by the SEC. What do you think about the timing, why now?

It seems more likely that these have been ongoing investigations that are just now being completed. Regulators may have taken an interest in crypto during the bull run of 2017. Investigations that were undertaken at that time are likely now coming to a close, and that’s why it appears the scrutiny against crypto exchanges is recent.

We could see crypto exchanges rushing to conclude settlements for past indiscretions as the expectation is that the Biden administration will more actively enforce applicable regulations.

What does it say about the broader crypto market that major exchanges have faced increased regulatory punishment but the prices of Bitcoin keeps surging?

There are many exchanges working earnestly to follow regulations and protect their customers, and governments are taking action against those who do not adhere to regulations or engage in questionable activities.

As crypto exchanges mature and work to address their regulatory challenges, and as regulators punish those who skirt their legal responsibilities, the industry will also mature and gain legitimacy and public trust. This, in combination with other factors such as increased customer access, institutional interest, and a growing belief in the value of bitcoin as an asset, have led to higher investment and higher prices.

What was the reasoning behind bitFlyer’s decision to lower fees for traders right now?

bitFlyer evaluated how we could bring the most value for our users. As a result of that evaluation, we felt that lowering fees was the best course of action.

What types of users is bitFlyer most intent on attracting right now? Users who have not purchased crypto before or more advanced crypto traders?

bitFlyer is working hard to ensure that our platform is user friendly for advanced crypto traders, first-time buyers, and everyone in between. Our platform was designed by former Wall Street traders which has allowed it to develop into a very capable and robust trading platform. Still, we work to develop and implement features that also support and educate less experienced traders as well. bitFlyer is a safe and powerful platform for anyone wanting to buy, sell, or learn about crypto.

From a compliance and regulatory perspective, are there any bold predictions you think we’ll see in the crypto market for 2021?

My prediction is that we’re going to see the US government accelerate its actions against rouge players. Institutions that aren’t meeting their regulatory obligations can expect consequences. A large challenge in the coming year will be adherence to the Travel Rule.

Overall, I believe the crypto market will mature as more and more institutional money finds its way in. Particularly, as legacy FinTech firms such as PayPal and Square get more involved.

Does crypto need more institutional money to continue its narrative as a hedge against inflation?

Institutional money has been accelerating their investment in crypto in recent months. This flow has served the crypto industry by bringing greater legitimacy and public awareness to cryptocurrency and its utility. Undoubtedly, this institutional acceleration has reaffirmed the narrative of crypto as a hedge against inflation.

What are the risks, if any, of Bitcoin being too controlled by large funds and institutions as opposed to low net-worth individuals?

As I mentioned, there has recently been higher enthusiasm for Bitcoin by large funds and institutions. However, there is still ample space for individuals and institutions to coexist. It is my belief that additional interest from corporate traders will enable individuals to enjoy greater asset appreciation of Bitcoin and the flexibility to utilize Bitcoin as an instrument in more avenues.

Large funds and institutions don’t pose a risk to individual traders so much as act as a conduit for the expansion of Bitcoin and cryptocurrency.

Let’s role play for a second — imagine Jay Clayton had called out sick, and you were named Chair of the SEC for a day. What is one thing you’d do to improve the current state of the cryptocurrency industry?

I would approve Bitcoin ETF and provide an easier path to licensing crypto broker/dealers.

Speaking of a Bitcoin ETF, do you anticipate we will see one within the next few years?

A Bitcoin ETF could come sooner than many people anticipate. In the near future, we will have sweeping changes in government leadership and subsequently their regulatory focus. At the same time, notable former regulators have been shining a more positive light on the crypto industry than in the past.

These, along with other institutional and societal factors, pave the way for larger-scale changes in securities regulations and in cryptocurrency. I think that a Bitcoin ETF may not be as far off as you might think.