by Chimezie Chuta

As the global blockchain and cryptocurrency industry ushers in another year, the anticipation of a bull run — possibly preceded by an altcoin rally — has reignited conversations about the infrastructure supporting this burgeoning sector. 2024 saw a lot of bold steps by regulators in different jurisdictions defining and providing clarity on the operations of Virtual Assets Businesses. While NITDA has re-inaugurated its National Blockchain Policy Steering Committee (NBPSC), SEC Nigeria has provided an ARIP platform and provisionally licensed some companies.

Awesome milestones!

It is a known fact that crypto exchange operators and virtual asset service providers (VASPs) are the gateways to the digital asset economy. Yes, we have decentralized exchanges (DEXs), but those are primarily used by advanced users. While these platforms have revolutionized access to financial opportunities, their operational practices often leave users vulnerable and frustrated.

I speak from personal experience!

One of the most concerning issues plaguing crypto exchanges, not only Nigeria-based VASPs but also globally exposed exchanges, is the arbitrary restriction of users’ accounts. This is a practice that has become alarmingly common. Despite the industry’s promises of decentralization and financial empowerment, many users find themselves at the mercy of centralized platforms that often lack transparent processes for account restrictions and dispute resolution. You name them; Binance, Bybit, Kucoin, etc… all are guilty of this act.

Imagine this: Users deposit their hard-earned money into a crypto exchange account, participates in trades, and builds a portfolio. Then, without warning, the platform restricts their account due to an unresolved Know Your Customer (KYC) issue or a perceived anomaly in their transaction history. The users, often left in the dark, is given no clear timeline for resolution or recourse to escalate their grievance.

One of the most egregious triggers for account restrictions is the failure to meet KYC requirements, particularly the “proof of funds” provision. While KYC is a critical component of anti-money laundering (AML) compliance, platforms frequently enforce it in ways that are inconsistent, opaque, and overly punitive. Users who cannot promptly provide documentation to satisfy these requirements often find their accounts frozen indefinitely, with no access to their funds or assets.

This issue raises a crucial question: Shouldn’t crypto exchanges and VASPs adhere to the same regulatory standards, and strict regulatory oversight as traditional financial institutions, particularly banks?

In the banking sector, regulators enforce strict guidelines to ensure transparency, accountability, and fairness in how institutions manage customers’ accounts. Banks are required to provide:

1. Clear Processes and Timelines: When accounts are flagged or restricted, banks must notify customers, explain the issue, and outline the steps required for resolution.
2. Dispute Resolution Mechanisms: Customers have access to structured processes for addressing grievances, including escalation channels and regulatory recourse.
3. Provisions for Account Succession: In cases of death, banks have well-defined procedures for transferring assets to the next of kin.

Crypto exchanges, on the other hand, operate in a regulatory gray area in many jurisdictions. While some progress has been made in aligning crypto regulation with financial sector standards, significant gaps remain. These gaps allow exchanges to wield unchecked authority over user accounts, often with little to no accountability. This is one of the areas we are calling on regulators to strengthen VASP compliances.

The absence of standardized procedures for dispute resolution, asset succession, and user communication undermines trust in the industry and contradicts its foundational ethos of empowering individuals.

My Key Concerns for Crypto Platforms

Arbitrary Account Restrictions
Exchanges should not have the unilateral power to indefinitely restrict accounts without clear communication and resolution pathways.

There must be:

• Defined timeframes for account investigations
• Transparent criteria for account flagging and restrictions
• Regular updates to users during the resolution process
• Clear pathway for customers/users to escalate such issues to regulators

Next-of-Kin Provisions:
What happens to crypto assets in an exchange in the event of a user’s death, or long incarceration? Unlike banks, most exchanges lack mechanisms to facilitate asset transfer to the deceased user’s next of kin. This oversight not only creates uncertainty but also poses ethical and operational challenges for the platform and the user’s family. SEC should step in here to constrain these practices.

User Protection Against Arbitrary Decisions:
Regulators must enforce rules that prevent exchanges from acting as judge, jury, and executioner over user accounts. Independent audits and oversight are necessary to ensure platforms act in good faith.

What I think that Needs to Change?

To align crypto exchanges and VASPs with the operational and ethical standards of traditional financial institutions, the following reforms are imperative:

Regulatory Parity with Financial Institutions:

• Crypto exchanges should be subjected to the same compliance, reporting, and operational guidelines as banks.
• Governments and regulators must establish clear frameworks for AML/KYC that balance security with user rights.

Mandatory Dispute Resolution Frameworks:

• Exchanges should implement formalized processes for resolving account restrictions, including timelines and escalation pathways.
• Regulators should provide oversight to ensure these processes are fair and transparent.

Asset Succession Policies:

• Platforms must create policies for handling user accounts in cases of death, including next-of-kin verification and asset transfer procedures.
• Smart contracts could play a role in automating such transfers securely and transparently, but VASPs must comply with these policies.

Independent Audits and Accountability Mechanisms:

• Regular audits by independent bodies should assess whether exchanges comply with regulatory requirements and user protection standards.
• Exchanges should also be required to publicly disclose their processes for handling account restrictions and disputes.

Global Collaboration on Standards:

• Given the borderless nature of crypto, international collaboration is crucial for creating unified regulatory standards. Organizations like the Financial Action Task Force (FATF), NFIU, EFCC and the International Monetary Fund (IMF) must take the lead in facilitating these efforts.

In Conclussion

The success of the blockchain and cryptocurrency industry hinges on trust, transparency, and user empowerment. Arbitrary practices by crypto exchanges and VASPs erode these principles, discouraging adoption and fueling skepticism. By enforcing robust regulatory standards, the industry can position itself as a trustworthy alternative to traditional financial systems, fulfilling its promise of decentralization and democratization.

As we enter a new year poised for significant growth in the crypto sector, it is imperative that exchanges and VASPs operate with the same accountability and fairness expected of financial institutions. This evolution is not just a regulatory necessity — it is a moral imperative to protect users and promote the long-term sustainability of the industry.

The future of finance is digital.

Let’s ensure it is also ethical, inclusive, and equitable.

Read also: Nigeria Blockchain Industry Leader Chimezie Chuta Urges Community to Support Industry Growth

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Chimezie Chuta: Tech innovation professional, Drupal Developer, Blockchain & Cryptocurrency Educator, Community organizer, and friend of disruptive ideas! Founder, Blockchain Nigeria User Group; Chairman, National Blockchain Policy Steering Committee (NBPSC); and Vice Chairman Blockchain Industry Coordinating Committee of Nigeria (BICCON). This article was first published on his Medium page.

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