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What’s happening with crypto and KYC compliance?



Cryptocurrencies have become increasingly mainstream. Despite that, until very recently the world of crypto has been largely unregulated and it's been down to individual providers to take the lead in terms of KYC good conduct. So, what's changing around crypto compliance?




The rise and rise of crypto

When Bitcoin launched in 2009, it was the only cryptocurrency on the market. Over subsequent years, various cryptocurrencies headed on to the world stage and exchanges became more accessible to the public at large. Despite turbulence, the global cryptocurrency market is worth around $1.65 trillion.

Crypto is now becoming more mainstream. El Salvador has made Bitcoin legal tender, Miami Mayor, Francis Suarez,  announced he would take his next pay check in Bitcoin and plans to pay his employees in cryptocurrency. He also has plans for residents to pay fees and taxes in Bitcoin.

In 2020 and 2021, the number of unique crypto wallets increased at a rate of around 20 million users each year. Additionally, DeFi (decentralized finance) – financial services built on public blockchains – is gaining in popularity.

Back in October 2021, the Eurosystem began investigation into the introduction of a digital euro: electronic money issued by the central bank (different from cryptos as it would be guaranteed by the state). And in the UK, around 2.3 million people are thought to own a crypto asset.

However, as more people have started to invest in cryptocurrencies, fraudsters have taken this as an opportunity to join the game. The threat landscape has changed, with consumers being drawn to riskier markets - new businesses and products have sprung up in response, but so have new criminal enterprises - capitalizing on weaknesses in the system.

Sadly, cryptocurrencies have been used for money laundering and terrorist financing, as well as a means to hide income from the tax authorities. This is prompting regulatory attention and change.




Moves towards compliance

Until recently, cryptocurrency was basically an unregulated area of financial services. There have been exchanges and providers that have acted as though they were regulated, taking anti-money laundering (AML) responsibilities seriously, but that hasn’t necessarily been because it was mandated.

Back in March 2021, the UK’s Financial Conduct Authority (FCA) added crypto companies to the list of businesses required to submit a financial crime report. The rules apply to cryptocurrency exchanges and custodial wallet providers.

Since January 2020, any businesses undertaking crypto-asset activity in the UK needed to be compliant with the Money Laundering, Terrorist Financing, and Transfer of Funds, including registering with the FCA.

In 2021, The Commodity Futures Trading Commission (CFTC) issued an order filing and settling charges against digital asset exchange operator Coinbase Inc for “reckless, false, misleading, or inaccurate reporting”. And Coinbase was ordered to pay a civil monetary penalty of $6.5 million.

Currently in the United States, any FinCEN (Financial Crimes Enforcement Network) cryptocurrency exchanges are required to carry out know your customer (KYC) checks on new applications and use effective AML controls. And in the European Union (EU), a regime is being proposed through MiCA (Markets in Crypto Assets) regulation. When the regime is adopted, only licensed providers will be allowed to offer cryptocurrency and operate crypto exchanges in the EU.

The UK government is also planning to bring the promotion of crypto assets within the scope of financial promotions legislation and subject to FCA rules – bringing it in line with the standards applied to other financial products such as stocks, shares, and insurance.




The future of crypto compliance

Despite the fragmented nature of regulation surrounding cryptocurrencies, some crypto firms have voluntarily acted to implement best practice around KYC and AML activity. 

Cryptocurrency’s journey so far has been marked by successes, upswings in fortune, scams, and scandals. Experts have predicted the next decade will “bring an explosion of low-cost, high-speed payments that will transform value exchange the way the internet transformed information exchange.”

The Financial Times has reported that sector experts believe the industry might fall under an expanded SEC definition of an “exchange”, possibly aimed at capturing platforms trading securities that lie outside the agency’s scope.

One of the key problems is that individual countries and regions take different approaches to regulation and dealing with issues related to cryptocurrency. This is a particular challenge, as many crypto service providers operate across borders.

To that end, the International Monetary Fund (IMF) has scoped a global regulatory framework to include licensed crypto-asset service providers, capital and liquidity requirements, and limits on exposure – aimed at providing a “comprehensive and coordinated approach to managing risks to financial stability and market conduct that can be consistently applied across jurisdictions, while minimizing the potential for regulatory arbitrage, or moving activity to jurisdictions with easier requirements.”

Wider institutional adoption and regulation means the future (and value) of cryptocurrencies will look very different in the years to come. Until then, much of the onus for good conduct in compliance remains on the exchanges and providers themselves.




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Moody’s Analytics Know Your Customer (KYC) is transforming risk and compliance, creating a world where risk is understood so decisions can be made with confidence.

Harnessing our innovative technology and industry expertise, Moody’s Analytics automates KYC screening for any product, in any jurisdiction, ensuring swift onboarding of new customers. We continue our support throughout the customer lifecycle by enabling the perpetual monitoring of counterparty risk across global business networks in near real-time.

Talk to us about your digital KYC processes – we would love to hear from you.