Know your crypto customer:  Global regulation and the future of cryptocurrency
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Know your crypto customer: Global regulation and the future of cryptocurrency

Darnell  Walker

Darnell Walker

Identity Verification Sales Director

For a crypto podcaster and Bitcoin enthusiast, 2022 has been a real thrill ride.  Cryptocurrency values have been on the world’s most expensive rollercoaster, a white-knuckle ride for crypto investors and a disorientating experience for crypto observers. Despite tumultuous times, however, there are reassuring signs that this fintech runaway train is heading toward the station.

After two years of wrangling, the European Union reached an initial agreement on its draft Markets in Crypto Assets (MiCA) regulation. MiCA is the first-ever crypto-specific regulatory framework; its provisions aim to protect investors while safeguarding traditional markets from the effects of crypto volatility.

Once passed into law around 2024, a licence and strict customer safeguards will be required to issue and sell digital tokens in the EU. There will be tough standards for stablecoin issuers and the market will be monitored closely for manipulation and insider trading.

WEBINAR Crypto regulation: Governing the financial frontier

Crypto-to-crypto transfer regulation

Mooted since 2018, this kind of regulation is inevitable, and mostly beneficial, as crypto enters the mainstream of financial markets. But rather than MiCA itself, it’s the EU’s regulation of the transfer of funds that’s upsetting the crypto community.

Plans to extend the EU’s financial-surveillance regime over the cryptocurrency industry form part of the EU’s latest anti-money laundering package and are running in parallel with MiCA. Existing travel rules – where payer and payee identity data must ‘travel’ with the transaction and be stored by both sides – will also cover crypto-to-crypto transfers.


“Cryptocurrency market value touched $3tn in early 2022, and this has the potential to go much, much further than that as trust in the currencies and technology is established.“


KYC for cryptocurrencies

Crypto-asset service providers (CASPs), like exchanges and wallets, will need to verify customer identities for even the smallest crypto transfer between two regulated digital wallet providers. Know your customer (KYC) checks for payments from exchanges to unhosted private wallets – the most contentious proposal – will be added to travel rules for transfers exceeding €1,000.

The EU wants to stop anonymous crypto transactions because of concerns as to how easily virtual assets can be used for money laundering and sanctions evasion. The aim is to make crypto asset transactions fully traceable in the same way as traditional money transfers.

Replacing anonymity with digital identity verification for crypto-to-crypto transfers increases the workload for crypto exchanges and encroaches on the individual privacy of crypto customers. It’s a delicate balance. But this is just the most recent addition to anti-money laundering (AML) and combatting the financing of terrorism (CFT) requirements and it won’t be the last.

Know exactly who is trading on your crypto exchange


End-to-end crypto fraud and compliance solutions

To comply with the new regulations, CASPs will have to find new technical solutions for discovering and securely exchanging with those unhosted wallet IDs while extending existing KYC/AML checks. Many will already have systems in place. Those that don’t will need to switch on a tried and tested solution of digital identity verification for their crypto service.

A KYC solution for cryptocurrency will automatically screen against the latest lists of politically exposed persons (PEPs) and sanctions, using digital identity document and data verification and biometric authentication to securely verify personal information like name, address and date of birth, leaving a detailed audit trail that satisfies AML reporting rules.

Combining a KYC solution with tools to detect identity fraud during customer onboarding and monitor customer transactions also reduces the risk of fraud for crypto companies. End-to-end identity verification, fraud and compliance solutions deliver a secure, smooth customer experience with real-time monitoring from one central dashboard across all channels and payment types.


“Crypto-asset service providers (CASPs), like exchanges and wallets, will need to verify customer identities for even the smallest crypto transfer between two regulated digital wallet providers.“


Building trust in cryptocurrencies

There will be many more twists and turns but the end of crypto’s thrill ride is in sight as the world is increasingly accepting of cryptocurrencies and at ease with the underlying fintech.

Regulation and transparency help this process. In 20 years, the online gaming industry has moved from a pariah to a well-regulated $57.5bn global industry. Cryptocurrency market value touched $3tn in early 2022, and this has the potential to go much, much further than that as trust in the currencies and technology is established.

A regulated crypto market will prevent fraudulent schemes, protect investors and deter criminal activity, bringing legal certainty, forestalling damaging enforcement action and increasing customer trust in both crypto assets and markets. With blue-chip names like Morgan Stanley and BlackRock leading institutional investment and many countries planning digital versions of their national currencies, crypto is set to be integral to the global financial system.

Compliance: the future of cryptocurrency

Knowing exactly who wants to trade on your platform and flagging cases of fraud and money laundering make good business sense. And, in an increasingly regulated market, CASPs taking responsible compliance action will increase their credibility, making them more attractive to banking partners or credit card providers, as well as a more tempting acquisition target.

As the world’s largest trading bloc, the European Union is setting the standard for a regulated global crypto market; where it leads, others will follow. With new legislation coming soon in the USA and other jurisdictions, CASPs taking positive compliance action today will be ready to take advantage of a global, regulated crypto market.



Are cryptocurrencies regulated in the USA?

Despite a large number of crypto investors and blockchain businesses in the United States, there isn’t a clear regulatory framework yet. The Securities and Exchange Commission (SEC) views cryptocurrency as a ‘security’, while the Commodity Futures Trading Commission (CFTC) calls Bitcoin (BTCUSD) a ‘commodity’ and the Treasury calls it a ‘currency’.


Are cryptocurrencies regulated in the UK?

The United Kingdom considers cryptocurrency as property but not legal tender. Cryptocurrency exchanges must register with the UK Financial Conduct Authority (FCA) and are banned from offering crypto derivatives trading.


Are cryptocurrencies regulated in the EU?

The Markets in Crypto Assets (MiCA) regulation is the European Union’s attempt to define a framework that increases consumer protections, establishes clear crypto industry conduct, and introduces new licensing requirements. Cryptocurrency is legal throughout most of the EU, although exchange governance depends on individual member states. The EU’s Fifth and Sixth Anti-Money Laundering Directives (5AMLD and 6AMLD) both tighten KYC and CFT obligations and reporting requirements for cryptocurrencies.


Will the EU Markets in Crypto Assets (MiCA) include NFTs?

No. For now, non-fungible tokens (NFTs), will be excluded as they don’t fall under existing crypto-asset categories. But the European Commission will assess the situation again within 18 months after MiCA regulation comes into force. If necessary, an additional legislative proposal will be drafted then to set up a regulatory regime specifically for NFTs.


WEBINAR Crypto regulation: Governing the financial frontier