Bitcoin Regulations News

British Financial Watchdog Approves BCB Group as Authorized Payment Firm

BCB Group, a European crypto-focused payment processor for the likes of major global crypto firms like Coinbase, has secured a license from British regulators.

The United Kingdom’s Financial Conduct Authority (FCA) has officially approved the firm’s core subsidiary, BCB Payments, as an authorized payment institution (API), BCB Group announced on Jan. 29.

The company is now officially regulated both in the U.K. and Switzerland

Having secured an API license from the FCA, BCB Group now holds two regulatory approvals to offer cryptocurrency-related services in Europe. BCB Payments sister firm, BCB OTC Trading SARL, is already regulated in Switzerland as it’s overseen by the Financial Services Standards Association, a self-regulatory organization recognized by the Federal Financial Market Supervisory Authority.

According to the firm, BCB Group is now the only dually regulated institution of its kind to offer customers a unified suite of payment services, crypto trading and custody services. The company’s platform is enabled with its proprietary application programming interface and integration into the R3’s blockchain network Corda, the press release notes.

Coinbase, Bitstamp and Galaxy Digital are among clients

More specifically, BCB Group’s business is focused on providing business-to-business payment services and cryptocurrency market liquidity for institutional clients. The company services some of the world’s largest crypto companies including United States-based crypto exchange and wallet service Coinbase and major European crypto exchange Bitstamp. Other clients include major crypto merchant bank Galaxy Digital and crypto brokerage firm Tagomi, the firm said.

Oliver von Landsberg-Sadie, founder and CEO at BCB Group, noted that the recent regulatory approval shows that the industry is able to grow while ensuring that it fully complies with “some of the most stringent regulations in force globally.

The news comes weeks after the FCA officially announced that it began supervising Anti-Money Laundering (AML) compliance of local crypto-engaged companies. On Jan. 10, the British financial regulator purportedly became the U.K.’s sole AML authority for the crypto business.

Source Cointelegraph

Draft of India’s National DLT Strategy Calls for State-Run Digital Rupee

A draft of India’s national strategy on blockchain and distributed ledger technology suggests a central bank digital currency (CBDC), the digital Indian rupee, and a national blockchain.

The National Institute for Smart Governance (NISG), a non-profit public body incorporated by the government of India, has published a draft document on the country’s national blockchain strategy. Issued on Dec. 30, the document appears to have been published recently as major local publications such as The Economic Times of India reported on the draft strategy on Jan. 28.

Digital rupee should be issued on a national blockchain of India

In the document, the NISG has proposed the Central Bank Digital Rupee (CBDR), a digital currency issued on a national permissioned blockchain. NISG  “strongly recommended” that the CBDR be issued by India’s government and the country’s central bank, the Reserve Bank of India. The document reads:

“As an alternative to Public Blockchains that operate with native cryptocurrency, like Ethereum, it is strongly recommended that Government of India along with RBI come out with a Central Bank Digital INR (CBDR) administered over a Public Permissioned Blockchain that processes transactions through a Turing Complete Virtual Machine allowing decentralized applications to run on its platform.”

Light touch regulatory approach is needed to address an existing lack of clarity

The NISG also outlined the existing legal challenges for the industry in India associated with lack of regulatory clarity. As such, the body urged Indian authorities to develop and promote regulatory clarity in the industry by publishing official statements instead of making public statements:

“Public statements, whether through the press or formal speeches, are helpful but are not official statements of application by the agency. If an agency intends to enforce its laws in new and innovative ways, it must first notify industry stakeholders of its intent to do so and the way in which existing law applies.”

Additionally, the company recommended adopting a “light touch regulatory approach” at the initial stages of the blockchain industry’s development in India. According to the NISG, existing regulation in India is “too restrictive” and does not take into account the potential of emerging technologies.

India’s central bank said it hasn’t banned crypto

The news comes a few days after the central bank of India said that virtual currencies are not banned in the country, elaborating that instead, regulated entities are banned from offering crypto assets in the country. As reported, the RBI banned Indian banks from providing crypto-related services in the country in 2018.

The RBI made its statement amid ongoing court hearings against the central bank at the Indian Supreme Court, as an consortium of crypto firms and experts attempts to have the ban repealed.

Source Cointelegraph

Gemini Europe Hires New Chief Compliance Officer for Europe Expansion

Gemini Europe — the United Kingdom and EU affiliate of the Winklevoss twins’ United States-based crypto exchange Gemini — has appointed a new chief compliance and money laundering reporting officer.

As part of the firm’s expansion into the transatlantic market, the new appointee, Blair Halliday, will oversee Gemini Europe’s compliance program in the region. 

A press release published on Jan. 28 revealed that Halliday will be based in London and report directly to Gemini’s managing director of the U.K. and Europe, the former Sterling Bank executive Julian Sawyer.

A career tackling financial crime

Halliday formerly served as chief compliance officer for crypto finance firm Circle across the Europe and the Middle East and Africa region, where he directed the firm’s global anti-money laundering compliance program.

Prior to this role, he served as executive director of financial crime and compliance at U.K. fintech CashFlows and as CCO at New York Stock Exchange owner International Currency Exchange.  

Before his move into fintech and digital assets, Halliday worked at the Royal Bank of Scotland for 14 years in various roles focused on tackling financial crime.

Rules and “thoughtful regulation”

The Winklevoss’ approach to compliance has in the past drawn some criticism from the more libertarian fringe of the community, as with their “Crypto Needs Rules” ad campaign in 2019, which made a strong bid to remold crypto’s image with an emphasis on robust regulation and compliance-driven market practices.

At the time, a senior Gemini executive said the form believed crypto investors “deserve the exact same protections” and standards as those in traditional markets.

In the platform’s recent stage of European and U.K. expansion, Cameron Winklevoss has continued to emphasize this agenda, writing in a blog post in December 2019 that:

“The concept of thoughtful regulation itself was first developed out of the lessons learned in these [E.U. and U.K.] markets over centuries. Our ethos — to ask permission, not forgiveness — was a first in the crypto industry and both honors and continues to build on Europe and the UK’s tradition of thoughtful regulation.”

Source Cointelegraph

Israeli Regulators Request Feedback to Foster Blockchain Innovation

The Israeli Securities Authority (ISA) has issued a Jan. 20 Request For Information to identify potential regulations that prevent the development of blockchain-based ventures in the country. In addition, the regulator seeks to find out the practical applications of Digital Ledger Technology (DLT).

As Israel’s financial watchdog, the ISA formed a committee to promote the development of the blockchain industry in the country. The regulator focused on platforms that issue and trade blockchain-based securities and their properties, including the use of tokens and smart contracts.

This initiative builds from the work of an earlier committee that studied the risks posed by initial coin offerings in early 2019. At the time, they identified the need for regulatory adjustments to create proper infrastructure for security tokens.

Potential for and risks of DLT

The regulator emphasized that DLT “has the potential to promote the Israeli capital market.”

Specifically, it may reduce trading costs and systemic risks to the economy, in addition to better access to capital markets for Small-Medium Enterprises (SME).

The committee did not identify significant risks to blockchain technology, beyond the general cautiousness warranted for any new technology. As long as the specific platform fulfills regulatory aims such as anti-money laundering and financial stability, the regulator has said it will maintain a technology-neutral approach.

At the same time, the ISA expressed interest in studying practical applications of blockchain technology. It noted that most of the benefits attributed to DLT “are for the most part theoretical,” primarily due to their early stage of adoption.

Request for information

The regulator posed several questions to the public to improve blockchain’s regulatory standing in the country. Development of capital markets is a primary concern, with the ISA directly asking for provisions that “impede the development of a digital market in Israel.” The committee also asked for information on additional risks and use cases specific to the trading of DLT-based securities.

The ISA also invited entrepreneurs to present proofs of concept of features that would ease the development of digital exchanges in the spheres of custody, legal documentation and others.

The initiative appears to be an attempt to streamline the development of blockchain startups, especially exchanges. Despite recording impressive growth in the sector, the Israeli government is often criticized for hindering innovation in the country.

Source Cointelegraph

Ukraine to Block Crypto Wallets for Illicit Funds, Finance Minister Says

Ukrainian authorities will be able to “block crypto wallets” in order to seize illegally obtained assets, a notice on the country’s Ministry of Finance says.

Oksana Markarova, Ukraine’s Finance Minister, reportedly said that the State Financial Monitoring Service of Ukraine (SFMS) will be the responsible authority for tracking the sources of origin of the funds on citizens’ crypto wallets.

Authorities use an analytical product scanning for the crypto funds’ origins and uses

As part of the regulatory policy, the SFMS will be able to not only find out the origin of crypto, but also detect how those funds have been spent, Markarova said in a Jan. 23 report placed on the official website of Ukraine’s Finance Ministry.

Markarova, who has been serving as Ukraine’s Finance Minister since late 2018, initially told the news in an interview with local business publication The text of the report on Ukraine’s Finance Ministry website is basically a copy of the original report on

Specifically, the SCFM claims to have access to an “analytical product” that purportedly allows investigators to look at the origins of crypto assets as well as their uses. According to Markarova, there have been a number of “successful cases” of investigations via the service.

Blocking crypto wallets is possible as a “result of complex investigations”

Markarova elaborated that halting crypto transactions is impossible, while blocking wallets is possible through private keys:

“It is impossible to stop operations now, but it is possible to block crypto wallets and remove illegally obtained crypto assets. This can be done by gaining access to the crypto’s private keys as a result of complex investigations.”

Cointelegraph asked the SCFM about their capabilities in blocking crypto wallets of Ukrainians but did not receive an immediate response. This story will be updated should they respond.

Action is part of the AML regulation approved by the Ukrainian government in late 2019

According to the statement, the new responsibility of the SCFM will be part of a new crypto-related law that was approved by the Ukranian government in December 2019.

On Dec. 6, the Verkhovna Rada, the parliament of Ukraine, published a final version of a money laundering law that will handle virtual assets and virtual asset service providers per guidelines of the Financial Action Task Force (FATF). The document says that cryptocurrency transactions are among operations that have to be monitored by relevant authorities.

As part of the new law, all crypto transactions up to 30,000 Ukrainian hryvnia ($1,300), will reportedly have to be accompanied with Know Your Customer identification and information on the nature of the business relationship between the payer and payee. Additionally, the new law will reportedly come into force on April 24, 2020.

Source Cointelegraph

Hawaii Introduces Bill Authorizing Banks to Offer Crypto Custody

The Hawaii State Senate has passed the first reading of a bill authorizing banks to hold digital assets in their custody.

The bill was introduced on Jan. 17 by five state senators, including the only Republican member of the Senate, Kurt Fevella. It passed the first reading on Jan. 21 and was then referred to the committees on Judiciary and Commerce, and Consumer Protection and Health on Jan. 23.

The bill specifies the set of provisions which a bank must adhere to in order to provide custodial services for digital assets. Custodial services cover “the safekeeping and management of customer currency and digital assets through the exercise of fiduciary and trust powers under this section as a custodian and includes fund administration and the execution of customer instructions.”

In order for a bank to qualify as a crypto custodian, it has to adhere to certain standards regarding accounting and internal controls, maintain IT best practices, and comply with federal Anti-Money Laundering and Know Your Customer requirements

Attempt to provide legal certainty for digital assets

In addition to opening up bank regulations to include cryptocurrencies, the proposed law would classify digital assets under the Uniform Commercial Code — a set of federal laws in the United States that aims to provide uniformity in legislation surrounding sales and commercial transactions in the country.

Digital assets would then further be sub-categorized as either digital consumer assets, digital securities, and virtual currencies. All are classified as intangible personal property.

Furthermore, the bill specifies the manner of perfecting a security interest in digital assets and discusses various methods such as smart contracts and multi-signature arrangements.

The proposed legislation also authorizes courts to hear claims relating to digital assets.

With digital assets, their security interest, and bank custodial services defined, the state courts are also given jurisdiction to hear claims in both law and equity regarding digital assets.

Hawaii loosening the reins on cryptocurrency

Hawaii has previously imposed strict requirements on firms dealing with cryptocurrency, causing the Coinbase exchange to cease its operations in the state almost three years ago.

If passed into law, this latest bill would not only give some clarity to classification of digital assets, bringing it in line with several other states. It would also set out a framework by which any compliant bank can act as a crypto custodian, which would potentially see Hawaii take a lead over many states in regulating this aspect of the cryptocurrency industry.

Additional reporting by Aaron Wood

Source Cointelegraph

Week Two of RBI Vs. Crypto at the Supreme Court of India

The Supreme Court of India has this week listened to further hearings in the landmark case against the Reserve Bank of India’s ban on banks’ dealings with crypto-related businesses.

On Jan. 22 and Jan. 23, proceedings continued with arguments presented by Ashim Sood, the legal counsel for the Internet & Mobile Association of India (IAMAI). 

In the wake of both public and industry-led petitions, the IAMAI brought a consolidated case against RBI’s imposition of a blanket ban on banks’ services to crypto businesses back in April 2018, which came into effect in July of that year. 

This week, Sood appeared before court alongside Nakul Dewan, who is acting as legal counsel for domestic cryptocurrency platforms.

This article draws on the extensive live reporting of Indian crypto regulatory news and analysis platform Crypto Kanoon (CK) via Twitter, as well as private correspondence with CK co-founder Kashif Raza. Embedded quotations are drawn from CK’s live summary of the court proceedings and are therefore not verbatim.

Jan. 22: some key contentions

As reported last week, Sood had argued against a definition of cryptocurrencies as currencies sensu stricto, noting that they can oscillate between serving as a commodity or store of value and as a medium of exchange. This debate on classification was picked up again in proceedings on Jan. 22, with Dewan arguing that:

“There are 2 things that a Crypto does. Its creation is that of a ‘good’ by the work of validation. Another is the medium of exchange for the group of people who recognize value in it.”

India’s Sale of Goods Act defines a good as anything movable that is not an actionable claim or money, the counsel noted. In a global context, he referred to a judgement by the Singapore International Commercial Court on cryptocurrency, which has held it to be an intangible property.

Countering this, Shyam Diwan, counsel for RBI, said that the central bank deems cryptocurrency to be a digital means of payment, not a commodity or store of value, and has therefore resolved “to adopt [a] nip in the bud approach” to ensure that the country’s payments system is protected and that alternatives do not take root in the economy. 

Diwan argued that the central bank is “empowered by law” in its intervention, which he claimed was in the interest of ensuring the effectiveness of monetary policy, upholding financial stability and overseeing cross-border capital flows.

Further arguments presented by the RBI counsel spanned concerns over operational risks, the lack of legal recourse and consumer protection for investors within peer-to-peer (p2p) systems of value transfer, and the difficulty of countering the use of cryptocurrencies for money laundering and terror financing.

Countering Sood’s arguments from last week that neither the government nor regulators had adequately collected and analyzed research material in support of their intervention, RBI’s counsel claimed that the central bank’s circular of April 2018 had been passed with “excellent understanding” of the risks posed by the new asset class.

Jan. 23

Shyam Diwan opened proceedings on Jan. 23 with a renewed focus on p2p exchanges that allow Indian users to transfer funds in foreign wallets, this time referring not only the ostensible Anti-Money Laundering and Combating the Financing of Terrorism risks but also pointing to potential contraventions of India’s Foreign Exchange Management Act, 1999 (FEMA). 

The Act holds that the central bank’s approval is required by those seeking to solicit foreign investment in India or to raise External Commercial Borrowings from banks abroad. This pertains not only to domestic operators, but equally to foreign corporations.

Focusing in the challenges posed by p2p models, the Judge questioned the counsel as to how the central bank circular and its restriction of banking services mitigates such risks at all:

“Your circular on stops banks to serve Crypto exchanges but [is] this circular is unable to stop trading between A and B?”

In response to this, the counsel conceded there remains a “loose end” insofar as the bank would be required to conduct further investigations to determine the source of transactions and mitigate risks, but claimed the circular itself serves to “discourage such transactions.”

The judge then turned to the exchanges’ counsel, observing that the trading of cryptocurrency remains active notwithstanding RBI’s action. 

Diwan responded, noting the drawdown in volumes and the “sharp decline in the prices after the RBI circular,” yet the judge countered this with reference to the global bear market and the relative irrelevance of the RBI circular for cryptocurrency valuations — a point with which the counsel concurred. 

In the next section of the hearing, the judge interceded with the observation that “being an honest contributor to the blockchain is more profitable than trying to tamper the chain.” In its live coverage of the proceedings, Crypto Kanoon remarked:

“It is a wonderful experience to witness a Supreme Court judge explaining facts about Blockchain and advocating its immutability. It is more exciting to see a Judge upholding Satoshi’s view.”

In private communication with Cointelegraph, Crypto Kanoon co-founder Kashif Raza singled out this moment as his highlight of the hearings so far. 

Raza further noted that the judge had taken stock of the fact that several of the prestigious Indian Institutes of Technology — represented in the case by Diwan as counsel — are now actively engaged in the nascent blockchain and cryptocurrency industry.

The remainder of the hearing on the morning of Jan. 23 centered on determinations of RBI’s powers under various statutes of Indian laws, the documents it drew upon for its decision and the nature of the central bank’s remit for preemptive action.

After breaking for lunch, Sood resumed arguments, steering discussion back to questions of classification and to the absence of legal grounds for prohibiting the use of cryptocurrency as a medium of exchange. 

Price volatility, the AIMAI counsel argued, tempers the use of cryptocurrency as a strict medium of exchange. He also provided further examples of international judgements on distinctions between goods and currency and underscored the wider potential of cryptocurrency as a technology, as with the Ethereum project. Sood argued:

“There is a cost which is required to maintain the efficiency of blockchain which is not possible without VCs [virtual currencies]. We don’t say that it is not possible to separate Crypto from Blockchain. But there is a valid and legitimate reason for both to go together. Crypto makes Blockchain viable for certain uses.”

Sood then presented a series of arguments centered on RBI’s statutory authority to take action, reiterating his arguments on the insufficiency of original research material as grounds for the central bank’s decision and the law’s inhibition of “capricious” and “arbitrary” interventions. 

The central bank, he contended, has honed in on the illegitimate uses of cryptocurrency and turned a blind eye to its legitimate applications. Moreover, there is no evidence that the sector is adversely — or otherwise — impacting national payments systems, Sood said. 

Citing a range of reports he judged may or may not have been studied by the central bank, he contended that “it is hard to believe that any reasonable person can reach to a conclusion about risk[s] to market integrity” on their basis. 

Instead, the counsel claimed, the circular appears to boil down to a consumer protection measure, and yet even as a preemptive action, it lacks a basis in a “clear, present and eminent danger” to the public interest or order.

The week ahead

Cointelegraph will continue to cover the hearings as they resume on Jan. 28.

On Jan. 27, two of the earliest petitions brought against RBI will also be heard by the Supreme Court, notwithstanding previous indications that the government would attempt to forestall them.

Source Cointelegraph

SEC Charges $600,000 ICO Project Opporty for Fraudulent Security Offering

The Securities and Exchange Commission (SEC) has charged Sergii Grybniak, the founder of the initial coin offering (ICO) project Opporty, according to a Jan. 21 press release. Despite raising approximately $600,000, the commission targeted Grybniak for falsely declaring the project as “100% SEC compliant.”

Opporty launched its ICO between September and October 2018. The project purported to provide a “blockchain-based ecosystem for small businesses and their customers,” primarily in the United States. The platform was meant to be a place where small businesses could list their services and enter into agreement via smart contracts.

The ICO for the OPP token raised $600,000 from approximately 200 investors, some of whom were located in the U.S.

While the SEC’s primary charge is for conducting an unregistered sale of securities, it also claims that the project made many misleading and false statements to encourage investment.

Among them, Opporty claimed to have onboarded thousands of “verified providers” to do business on the platform, the majority of which “had expressed no such willingness,” the SEC complaint reads.

A claim of having more than 17 million businesses in its database was revealed to be a simple purchase of a third-party catalog.

Finally, the SEC alleges that the project lied about a partnership with a “major software company.”

The accused founder is a resident of Brooklyn, against whom the SEC seeks injunctions against future digital offerings, the return of all ICO money and civil penalties.

Inconsistent targeting from the SEC

The case against Opporty is an outlier given the caliber of projects previously targeted by the SEC.

Notable cases include the litigation for Telegram’s $1.7 billion ICO, Kik’s offering for $97 million, and recently, Boaz Manor’s $30 million token sale.

By contrast, other projects received far more lenient treatment. The SEC settled with EOS parent company for $24 million, out of a $4 billion ICO. Debates around XRP’s security status did not yet result in an investigation by the regulator. Other projects, such as TurnKey Jet, received no-action letters by the SEC.

While the SEC pledged to offer more lenient and flexible treatment to crypto projects in 2020, it appears that some projects will remain under scrutiny.

One possible distinction for Opporty is that, in addition to offering unregistered securities, the project allegedly lied about its achievements. In addition, unlike many similar ICOs, the offering did not explicitly exclude U.S. investors from participating.

Source Cointelegraph

Deribit Releases Specifics of New KYC Policy Following Move to Panama

Deribit, a crypto futures and options exchange that is moving from the Netherlands to Panama to avoid Europe’s new Anti-Money Laundering law has released its newly updated Know Your Customer (KYC) policy.

In a Jan. 17 blog post, Deribit clearly said that its relocation to Panama has been mainly caused by the new Anti-Money Laundering Directive (5AMLD), a major European law that aims to tackle money laundering and terrorist financing by stricter regulation of crypto-related businesses.

While 5AMLD was enforced on Jan. 10, 2010, 5AMLD has not been adopted in the Netherlands to date, but is still expected to come into force in the upcoming months, Deribit said, adding:

“Due to the ambiguity of the 5AMLD implementation process, it is not known how the new regulation will affect Deribit.”

Panama-based Deribit is coming on Feb. 10, 2020

Deribit originally announced the news on Jan. 9, noting that starting from Feb. 10, 2020, the entire operational platform will no longer be operated by the Dutch company Deribit B.V., but DRB Panama, which is a 100% subsidiary of the Dutch entity. While Deribit’s operations alongside client holdings and system settings are moving to Panama, the company’s servers will be moved to London, the company said.

After the relocation, Deribit will apply new terms of service and privacy policy, which will be “materially similar to the terms of Deribit B.V.,” the firm noted.

Two tiers for KYC requirements to apply in February

However, the exchange will purportedly significantly alter its KYC requirements, according to the announcement. Basically, Deribit will introduce an additional tier of KYC requirements, providing two different KYC levels — Level 0 and Level 1 — in order to prevent illegal activities on its platform. Level 0 will allow Deribit clients to trade up to one bitcoin (BTC) or 50 ethers (ETH) per 24 hours, while no trading volume limits apply to Level 1.

Specifically, Deribit is planning to register all its current clients as Level 0 clients. Level 0 KYC requirements will require only basic information such as email, name, date of birth and country of residence. Meanwhile, Level 1 requires proof of your identification such as passport or government ID and portfolio margining.

The full list of Deribit’s new KYC requirements is available on their site.

Deribit KYC requirements as of 10 February 2020

Deribit KYC requirements as of 10 February 2020. Source: Deribit

Crypto industry to strengthen AML and KYC compliance

Deribit noted that the exchange reserves the right to immediately close any account on the platform and liquidate any open positions in case it finds out that provided account information such as location or place of residence was false.

The company added that Deribit had partnered with major blockchain analytics firm Chainalysis in order to strengthen its tools for monitoring suspicious crypto transactions.

Deribit is not the first company to change its operating structure due to new KYC and anti-money laundering laws enforced by the European Union. In fact, some companies such as crypto wallet provider Bottle Pay had to cease operations in late 2019, claiming that the regulatory scope would ruin existing user experience.

In contrast, other crypto-related firms in the EU such as U.K.-based CEX.IO exchange claim that they have been fully compliant with the new law as they had been extensively working on its compliance policy since 2014.

Source Cointelegraph

FCA’s New AML Regime – UK’s Crypto Market Will Have to Adapt in 2020

The Financial Conduct Authority (FCA) is now the United Kingdom’s sole Anti-Money Laundering (AML) authority for the crypto business. After a decade of compliance under a laissez-faire approach to AML legislation, U.K.-based crypto firms now face a significantly more stringent set of rules. With the FCA thrashing U.K. crypto regulation into shape, the consequences upon start-ups, user privacy and adoption will likely be wide-reaching. 

In its early stages, decentralized finance (DeFi) has uncovered a bounty of possibilities within the economic sector. From borderless banking to using blockchain technology, DeFi is leading a comprehensive coup d’état against an entrenched financial industry. Nevertheless, inherent benefits aside, cryptocurrencies aren’t without their pitfalls.

One particular snag arises from one of the fundamental characteristics of cryptocurrencies: anonymity. Within any given transaction, personal information is confined to a pseudonymous string of characters, also known as the public address. 

This singular address provides everything needed to carry out a monetary transfer, without compromising on user privacy. Given this, it’s perhaps unsurprising that money laundering miscreants are forming an affinity with digital assets.

Regulation rising

Last year, tensions surrounding cryptocurrency money laundering were front and center. A report from analytics firm Chainalysis confirmed that $2.8 billion of illicit Bitcoin (BTC) had been laundered via crypto exchanges in 2019. However, rather than condemning the exchanges themselves, the report took aim at the underregulated over-the-counter brokers operating within them.

Speaking to Cointelegraph, Jesse Spiro, head of policy at Chainalysis, believes that “Cryptocurrency’s inherent transparency makes this a solvable problem,” adding that the issue may have an internal solution:

“Money laundering in the fiat world is typically a black box that can often only be opened by getting a search warrant and poring over a suspect’s bank records. Here, the industry and law enforcement can see how these bad actors move money and take steps to shut them down.”

Looking to solve them the dilemma — but refusing to abide by inherent transparency alone —  the Financial Action Task Force (FATF) introduced the Travel Rule — a requirement forcing member nation crypto firms to disclose customer information on transfers over $1,000. 

This resulted in an entirely different set of tensions but from the cryptocurrency community this time. Many propagators of the industry remain diametrically opposed to the Travel Rule, deeming it an invasion of financial privacy. Spiro confirmed that the new rule posed a problem for privacy coins in particular:

“We expect this trend to continue as local regulation around the world begins to align with FATF, and privacy coins such as Zcash emphasize their ability to ‘turn on’ transparency as well.”

Indeed, paying no heed to the zeitgeist of the digital generation, scores of regulators followed the FATF’s suit, bolstering their own crypto-centric AML policies.

Related: New EU AML Compliance Laws Could Disrupt the Crypto Industry

In Europe, the EU released its 5th Anti-Money Laundering Directive (5AMLD). Along with it came a heavy crackdown on money laundering and terrorism financing. The directive upped the ante on the already unforgiving Know Your Customer (KYC) and AML compliance — forcing multiple crypto firms into liquidation. U.K.-based crypto wallet provider Bottle Pay was among the first casualties citing a refusal to disclose user information as the primary basis for its termination.

The FCA’s demands

Things are about to shake up even more for the British-based companies. Last year, in late October, the FCA declared it was taking over as the AML and Counter-Terrorist Financing (CTF) supervisor of the U.K. But what does this mean for U.K. crypto firms and the wider cryptocurrency market?

The FCA is tasked with ensuring that all U.K. crypto firms adhere to the AML/CTF policy. The bulk of this AML compliance is gleaned from a menagerie of legislation, including the EU’s 5AMLD, and the amended Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017.

FCA jurisdiction officially came into effect on Jan. 10, 2020. From here on out, all U.K.-crypto companies are required to register with the agency. Luckily, existing business operations may continue unregistered but are required to sign up for FCA supervision by Jan. 10, 2021 — or terminate all activity.

Nevertheless, FCA supervision will be undertaken regardless of company certification. This supervision will consist of the same approach faced by other organizations within the agency’s regulatory scope. Additionally, businesses exhibiting higher risk will incur a “more intrusive” level of scrutiny than others. 

As part of their supervisory assessments, the FCA requires businesses to provide policies and procedures in mitigating any AML/CTF risks. The agency advises firms to carry out their own evaluation of risk controls to confirm suitability. This also includes appointing a member of the board to ensure adherence to AML/CTF policy.

Persecuting privacy

While these protocols appear fairly typical, probe deeper into their “non-exhaustive” list of compliance orders, and you’ll unearth one stipulation that stands out as potentially problematic.

Nestled into the FCA’s supervisory guidelines is the following requirement, prompting crypto firms to:

“Undertake ongoing monitoring of all customers to ensure that transactions are consistent with the business’s knowledge of the customer, the customer’s business and risk profile.”

It seems the FCA isn’t taking an easy line when it comes to AML/CTF compliance. And while this was expected, the adage of regulation stifling innovation is perhaps applicable. As we’ve observed so far, the inability to provide financial privacy has already backfired for several crypto firms — and will likely impede exchanges and wallet providers more than most.

Anonymity sacrifices aside, the necessity to undertake KYC checks for every patron is sure to cause delays. However, with increased financial responsibilities along and added staffing requirements, the burden on crypto firms is becoming increasingly heavy.

Universal consequences

Cal Evans, a managing associate at Gresham International and a U.K. lawyer, aided the FCA in forging their crypto guidance. Speaking to Cointelegraph, Evans weighed in on the new regime’s potential ramifications on the broader crypto market:

“As we saw with the earlier EU draft of the law, the whole purpose of these measures (across the EU) is to stop the abuse of anonymity being used within the crypto space. These new measures will 100% impact on the privacy of crypto users. They are trying to stamp out the privacy associated with the use of many cryptocurrencies.”

Of course, while several cryptocurrencies can provide a degree of anonymity, none offer the same level of obscurity as the privacy coin. It stands to reason that these cryptocurrencies will cease to exist, at least via U.K.-based exchanges. Evans argues that many will simply migrate off-shore:

“Privacy coin holders will be impacted by this the most (within the U.K. market), however, many will most likely trade these coins privately or through an exchange which does not deploy such high KYC requirements. This means you will see many ‘private chain’ coins move to off-shore exchanges.”

Still, all things considered, regulation remains an innately positive thing. In fact, for the cryptocurrency industry, it’s a blessing — a well-disguised blessing, but one nonetheless.

This much is evident from Chainaylsis’s money laundering report, which concluded that fitting KYC implementation would have stopped the illicit BTC dealings in its tracks. Spiro stands by this, opining that local regulation, if implemented globally, could stamp out illicit activities and bad actors, which, in turn, might be hugely beneficial for mainstream adoption:

“Broader regulatory initiatives (FATF, 5AMLD) have already been initiated, and now local regulation is starting to follow, which is the intended progress for AML/CFT regulation. Additionally, as we see more illicit activity mitigated as the result of regulation, institutional adoption will become a reality, which will be key for future global adoption.”

Indeed, alongside effective regulatory oversight comes further legitimacy. London has always been a pioneering force in the fintech industry. However, with a major U.K. regulator now keeping tabs, the crypto industry will arguably garner further respect from the broader financial sector, possibly encouraging institutional participation within the U.K. Evans conceded that while these new regulations will boost institutional interest, it may end up alienating startups:

“The U.K. has long been a ‘safe heaven’ for companies looking to operate in the crypto market. The ease of incorporation and flexible approach to crypto that the crypto task force had taken to date, often meant that crypto companies could operate within the U.K. with relative ease. The biggest impact we are likely to see is startups avoiding the U.K. altogether and more regulated ‘established’ firms moving there.” 

Startups remain a crucial facet of any economy. These firms not only generate fresh jobs but also instill further dynamism to the market by encouraging innovation and stirring competition.

This isn’t the only issue arising from the FCA’s new regime, according to Ian Taylor, the chair of CryptoUK, a self-regulatory trade association. Speaking to Cointelegraph, Taylor argued that the FCA may have left some sizable holes yet to be patched and that the FCA’s controls lacked clarity on global access to the U.K. market:

“The draft definition of cryptoasset income implies that the fees will apply to U.K. legal entities, which would infer overseas firms might be able to operate either without license or without being required to establish a U.K.-based legal entity.”

Essentially, this creates a loophole that could afford foreign companies leverage over U.K. based businesses. “The FCA should consider clarifying this position to ensure fairness of competition,” Taylor concluded.

As with most regulatory shake-ups, The FCA’s new regime is a double-edged sword. There’s a delicate balance to be struck between smothering innovation and allowing a no-holds-barred marketplace. For the most part, the consensus seems to be that the FCA is slowly reaching an equilibrium.

Source Cointelegraph