COMPLIANCE

Regulatory compliance for traditional crypto exchanges can resemble an inescapable maze. Once you step into that labyrinth, you may never find your way out. We recognized this early and set out to design a more adaptable system. In this article, we delve into our view on compliance, regulation, and how Houdini Swap’s innovative approach addresses many of the regulatory challenges faced by traditional crypto exchanges.

Traditional cryptocurrency exchanges face a multitude of regulatory obligations spanning the safekeeping of digital assets and custodianship to adhering to Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance. These exchanges also must obtain necessary licenses, such as Money Services Business (MSB)/Money Transmitter License (MTL) and broker-dealer, while complying with trade surveillance protocols and navigating privacy laws. To make matters more challenging, exchanges must manage a litany of rules at the local, regional, and international levels if they wish to provide public services.

It is important to understand that these stringent regulations are not arbitrarily imposed. Crypto exchanges often assume a bank-like stature, as they custody user funds. Without strict oversight, the ecosystem becomes susceptible to recurrent scams like what occurred with FTX. Navigating regulatory compliance presents a complex challenge for exchanges, yet overcoming these obstacles is a worthwhile endeavor. For those businesses confronting these challenges head on, we respect your bravery and thought leadership.

Houdini Swap strategically mitigates risks in each of these functional areas by exclusively serving as an aggregator of exchanges, combining the best of the publicly accessible swap technologies in one convenient location. Simply put, Houdini Swap is an affiliate marketer for other publicly available exchanges.

Houdini Swap never interacts with a user’s crypto. At no point does Houdini Swap safekeep, store, transfer, transmit, nor route any user crypto. Houdini Swap doesn’t even have its own liquidity pools. Instead, the deposits, transfers, and transmissions occur exclusively through our exchange partners. We are not an exchange, not a mixer, nor have any deployed smart contracts that relay funds. Houdini swap is strictly an affiliate website that aggregates rates from publicly accessible exchanges and presents these rate options to users.

This non-custodial design allows us to effectively transfer the burden of regulatory licensing and compliance to our exchange partners. No different from how Google indexes public internet information and provides links to its searchers; Houdini Swap indexes online public exchange rates and makes them accessible to users.

Despite our non-custodial design, we still have compliance obligations to our users. Our compliance initiatives focus on exchange partner due diligence. First, we look at their policies. Next, we look at their operations.

To evaluate an exchange partner’s policies, we start with the basics by looking at their AML compliance policies, anti-crime measures, and privacy policies around safeguarding the privacy of our users and their information.

Our exchange partners' AML compliance policies must mandate screening of all transactions. Exchange partners screen transactions through dedicated deposit addresses. Funds sent into these deposit address undergo thorough checks for sanctions, criminal activity, or ongoing investigations. If a transaction is linked to an active investigation, funds are frozen and returned to law enforcement. Other high-risk transactions may require user KYC or may simply be refunded. Our priority is the safety and integrity of our platform, protecting users from illicit activities. We are not a platform for criminals and never will be.

Next, we ensure that exchange partners have the policies in place expected from a compliant exchange – no different from a bank assessing a new vendor. We sign contracts with exchange partners clearly affirming that they are following all rules within their respective jurisdictions. Exchange partners provide us with Terms of Use and we follow those with great care. We are not regulators and cannot be held to a higher standard than a bank for vendor due diligence. It is not Houdini Swap’s role to evaluate the regulatory capture of our exchange partners. That is the providence and decision of regulators.

If we ever learned that one of our exchange partners was not adequately complying with applicable regulatory frameworks, Houdini Swap would immediately cease its relationship with them. Offering an illegal exchange to our users would go against our core values and compliance obligations.

Once we are comfortable with an exchange partner’s policies, we then look into their operations. We start with a cursory search on social media and ratings websites to monitor for any negative feedback or sentiment. We then go one step further and perform background checks on both the principals and the exchange partner’s business to ensure there are no nefarious or misleading actors behind the business.

We have proactively consulted and paid numerous compliance professionals, lawyers, and crypto forensic firms to develop our compliance initiatives and light-touch structure. The consensus is that the internal controls we have implemented align with current industry best practices.

By leveraging the independent compliance responsibilities of our exchange partners, we can focus on what truly matters to users; providing a seamless, private, cost-efficient, and secure swapping experience.