A project can invest $500,000 in legal opinions, feature a fully doxxed team, and pass every AML check in Singapore, yet still see its value plummet to zero in twelve seconds due to a mathematical error in its smart contract. This is the stark reality of modern cryptocurrency regulation and compliance.
While various jurisdictions have implemented different regulatory frameworks, these often act as Maginot Lines, primarily protecting against front-door risks such as money laundering, market manipulation, and the misuse of customer funds. However, the regulatory posture remains fragmented across jurisdictions, and not all regulators offer standards that are practically fulfillable.
Although the intentions behind these regulations—prioritizing the legal protection of the end user—are commendable, their current focus is not on driving measurable improvements in how market participants operate. For instance, the EU's Digital Operational Resilience Act (DORA) obliges financial entities to rigorously vet third-party providers and monitor their security posture. These are governance controls, not execution blocks. A supply chain attack, such as a compromised API or malicious code injection in a vendor's software update, can execute a scripted drain of funds or data in mere seconds, often automated at machine speed. This is far faster than any compliance audit or quarterly review can detect.
In such a scenario, being DORA-compliant simply means the entity has a pre-approved incident response plan to freeze operations, notify regulators, and activate insurance after the catastrophic drain has already occurred. Meanwhile, the most significant threats—operational failure, technical incompetence, and fundamental economic flaws—remain unguarded.
Compliance brings traditional market rules to crypto, but it does not make a compliant project invulnerable.
The Compliance Marketing Trap
Currently, the industry is ensnared in a situation where compliance is used primarily as a marketing instrument. The sector treats a Know Your Customer (KYC) badge as a safety certification, which it is not. Knowing the CEO's name is irrelevant if their protocol lacks fundamental safeguards.
Regulators are often just checking boxes, such as:
- •Risk mitigation plan? Check.
- •Dependency risks outlined? Check.
- •Private key exposure due to a social engineering attack? In progress.
This box-checking approach is fundamentally flawed. Compliance is designed to identify and deter criminals and bring projects within the regulatory perimeter, not to prevent operational failures. In the volatile world of crypto, incompetence often destroys more capital than malice.
Where the Money Truly Disappears
Consider where the most significant losses actually occur. In 2024, established, compliant businesses, centralized exchanges, and infrastructure projects with legal entities and doxxed teams have suffered double the losses compared to decentralized protocols.
Fully compliant exchanges like Japan's DMM Bitcoin and India's CoinDCX and WazirX were not victims of rug pulls. These were regulated businesses that collectively lost hundreds of millions of dollars due to operational negligence. The common thread in these failures was a supply chain attack involving malware. Notably, regulators do not currently mandate rigorous audits for such vulnerabilities.
This highlights the core issue: the industry is auditing the code while neglecting the management and the largest risk surfaces. While code audits may identify a fraction of potential risks, they completely overlook operational failures, such as poor key management, which are responsible for a significant majority of major losses.
The Necessity of Compliance AND Measurable Risk
There is a critical confusion between "permission to operate legally" and "actual safety." A regulatory license serves to exclude money launderers and sanctioned entities, effectively locking the door on criminals. However, it leaves the window wide open for genuine project failure. A project can adhere to every AML rule and still face insolvency or a security breach due to mishandling its private keys.
Essentially, the regulatory process is still in its nascent stages. Expecting a comprehensive system that simultaneously ensures efficient tax collection, legal protection, and market resilience is unrealistic at this point. Consequently, regulation alone cannot currently address the fundamental structural issues plaguing the market.
To rectify this, the blockchain industry requires robust self-regulation. One effective approach is the development and adoption of a shared "Probability of Loss" framework. This framework would provide a common language for assessing risk, benefiting all stakeholders:
- •Investors: Instead of questioning "Is this a scam?", they can ask, "Does this team possess the necessary expertise?"
- •Institutions: They gain access to real risk metrics, moving beyond basic book checks.
- •Regulators: They receive a live health monitor, rather than a one-time approval stamp.
This metric addresses what compliance currently ignores: the practical reality of operational security. It scrutinizes treasury diversification, access controls, and code quality, thereby measuring the true structural state of a project and projecting its probability of survival.
Hacken is actively developing a Self-Regulation platform designed to bridge the trust gap in the web3 economy. This solution, currently in beta testing, introduces the Probability of Loss (PoL) metric. The PoL metric functions as a "credit score" for web3, offering a singular, forward-looking benchmark. It achieves this by synthesizing diverse risk indicators and aggregating data related to a project's security, financial stability, and the historical conduct of its team.
The Evolution of Due Diligence
The current trust model in the industry is fundamentally broken. We rely on superficial social signals: endorsements from key opinion leaders, backing from prominent investors, and the false reassurance of a regulatory license. These are merely superficial layers that fail to convey the structural integrity of the underlying product.
The pertinent question is no longer "Are they licensed?" or "Who is backing them?" Instead, it should be, "What is the probability that they will fail?" The market must begin pricing risk based on harsh realities, not on regulatory theater.
About the Author
Dyma Budorin, co-founder and board chairman at Hacken, is a distinguished cybersecurity expert and crypto economy influencer with over 14 years of managerial experience in cybersecurity and risk and controls audits. In his professional auditing career, Budorin served as Senior Manager of the audit department at Deloitte before becoming Audit Counselor at Ukrspecexport and Deputy CEO for Strategy and Development at Ukrinmash, both Ukrainian state agencies. In 2017, he leveraged his deep auditing experience to pivot into Web3, founding the cybersecurity consulting firm Hacken, which has become one of the world's most trusted blockchain security auditors. Budorin has consistently championed the highest security standards and advocated for greater transparency, a vital component of a Trustless Society. Today, Budorin is a Co-Chair at EEA DRAMA, a DeFi Risk Assessment Management and Accounting group at the Enterprise Ethereum Alliance. He is also a Vice President of the Blockchain Association of Ukraine. In 2021, Budorin was recognized among the Top 50 Ukrainian entrepreneurs.