Poloniex LLC, a popular cryptocurrency exchange, has reportedly agreed to pay a hefty $7.6 million settlement to the US Treasury Department’s Office of Foreign Asset Control (OFAC) for violating sanctions and not maintaining proper Know Your Customer (KYC) practices between 2014 and 2019. This begs the question – are such hefty penalties fair, or do they stifle innovation in the nascent blockchain industry?
On one hand, strict enforcement of regulations is essential in safeguarding investor interests and preventing the misuse of blockchain technology for illegal activities. Poloniex was found to have over 65,000 violations of various sanctions programs, allowing users from sanctioned countries like Iran, Cuba, Sudan, Crimea, and Syria to execute trades worth up to $15 million between 2014 and 2019. Adequate measures to prevent such violations can aid in building trust in the technology, paving the way for more widespread adoption.
On the flip side, an important aspect to consider is that Poloniex was a small startup during the period when most of these violations occurred. The exchange was eventually acquired by Circle in 2018, who significantly improved its compliance measures. Both Circle and Poloniex cooperated with OFAC during the investigation, which played a part in determining the penalty amount. This brings up the point that small startups in the blockchain space may lack the resources to establish robust compliance programs initially, and punitive regulatory enforcement has the potential to be a significant deterrent to innovation.
Given that OFAC guidelines stipulated a potential maximum monetary penalty of $19,692,872,800 and a minimum civil monetary penalty of $99,237,000, the agreed settlement of $7,591,630 can seem relatively lenient. However, it is important to remember that Poloniex previously agreed to a $10.3 million settlement with the United States Securities and Exchange Commission (SEC) for separate violations of investor-protection clauses under Federal Securities Laws.
With the current landscape of stringent regulations on cryptocurrency exchanges, the debate between the protection of investors and encouraging innovation isn’t an easy one to resolve. While imposing significant penalties can serve as a strong deterrent to unlawful practices, it could also hamper the growth of smaller startups that are exploring the potential of blockchain technology. Perhaps a more considered approach to regulatory enforcement will help strike the right balance between ensuring investor safety and fostering innovation in this rapidly-evolving industry.