Part 1: Cryptocurrencies and future regulatory requirements

9-07-2018 by John Devlin

An assessment by John Devlin, Principal Analyst & Founder, P.A.ID Strategies

Part one: A global tightening of guidelines

Regulatory activity is stepping up

With so much interest – and volatility – last year, governments and financial regulatory bodies around the world have been busy assessing their positions regarding crypto currencies and related digital assets. Countries such as Japan have led the way, requiring crypto exchanges to be registered and even suspending two exchanges in April of this year for failing to adhere to regulations around Know Your Customer (KYC) and Anti-Money Laundering (AML). Australia and Switzerland have both issued guidelines in an attempt to ensure best practice and to allow time to determine which direction the sector will likely develop. Others, including China and India, have taken a stronger position, clamping down for several reasons to limit the availability and access to crypto currencies. In South Korea, more than 20 exchanges have undergone voluntary evaluations to lead the way ahead of the expected introduction of regulations whilst CryptoUK is an industry-led group formed to advise, steer and implement policy.

AMLD5 and PSD2 necessitate strong KYC procedures

There is much discussion around what the final position undertaken in the US will be. It has been left open to the member states to determine their position around crypto, although overall it is moving towards registration and licensing of crypto exchanges. In Europe the 5th Anti-Money Laundering Directive (AMLD5) will come into effect at the end of 2019. It extends AMLD4 to address a broader range of companies that are deemed at risk of being involved in money laundering or illicit financing. Specifically, this includes crypto exchanges and custodial wallets referred to as “virtual currency exchange platforms” and “obliged entities” respectively. Under EU law these will be regulated to improve the detection of suspicious (crypto) transactions because of the capability to exchange with traditional fiat currencies and the control of funds in “payment accounts” (custodial wallets).

In addition to AMLD5, the Second Payment Services Directive (PSD2) and the concept of open banking, and the push for cross-border services increases as the EC tries to create a more unified market. In addition, the potential ability to use an existing verified identity and details to open accounts in another country means that financial service providers need to manage risk and compliance. Combined, this means that a lack of strong authentication increases the risk of abuse necessitating effective KYC procedures.

Stay tuned for our next installment, which will expore where regulatory activity has translated into action amongst crypto service providers. 

Read the full cryptocurrency report by P.A.ID Strategies

Learn more about Mitek's ID Verification