Throughout 2019, an increasing level of regulatory measures swept into the cryptocurrency sector. Due to the overly scrutinized procedures of the SEC, many cryptocurrency services and projects have dropped US residents. However, giving up such a large population makes the need to carefully comply with the terms of the rest of the world’s jurisdictional requirements incredibly important in order to retain what’s left of the user base.
2020 is likely going to bring more stringent measures than 2019, and rigorous changes have already been initiated with the newly settled AMLD5. The main driver behind this regulatory update is to decrease anonymity in crypto transactions and hence combat money laundering.
The Fifth Directive establishes what a cryptocurrency is and clarifies what sort of involvement with cryptocurrencies is to be regulated.
A legal definition of cryptocurrency: “a digital representation of value that can be digitally transferred, stored or traded and is accepted… as a medium of exchange.”
Key Crypto/ICO AMLD5 and Crypto/ICO KYC Compliance Measures:
- Cryptocurrencies and their respective Service Providers are now considered “obliged entities,” and face the same anti-money laundering regulations applied to financial institutions under the previous 4AMLD. Full customer due diligence (CDD) is henceforth required for cryptocurrencies the same way it is under the previous Directive, and suspicious activity reports must be submitted if transactions are made via cryptocurrency.
- Under AMLD5, financial intelligence units may obtain the addresses and identities of owners of virtual currency, and any irregularities must be reported to the respective national unit.
- Cryptocurrencies themselves must now be registered with their local authority, such as the Financial Conduct Authority in the UK and BaFin in Germany.
- Pre-paid cards and online transactions without customer due diligence are now limited to 150€ and 50€, respectively.
Crypto Service Providers (CSPs) now must reach out to the regulator in their home country and apply the requirements for their specific activity, or else risk heavy fines and the cessation of their Crypto activities.
Bottle Pay, Simplecoin, and Chopcoin have already closed all operations in late December as a direct consequence of this incoming regulation. Bottle Pay, who developed a tipping service that allowed users to send small amounts of cryptocurrency on social media networks and messaging apps through its browser extension, justified their closure by stating that:
“the amount and type of extra personal information we would be required to collect from our users would alter the current user experience so radically, and so negatively, that we are not willing to force this onto our community.”
Complying with the directive creates several problems for providers:
- The need to collect and verify information about who their customer is
- Perform a risk assessment before the customer is accepted
- Force a drastically different processing process upon users.
Subsequently, monitoring customers and their transactions directly clashes with the relative anonymity that customers so far enjoyed in the Crypto space. Not only this, but CSPs now have to completely change how customer onboarding and monitoring processes work, which carry considerable financial costs. Additionally, inadequate design of these due diligence processes can push away customers and significantly harm business.
There are increasingly more KYC providers in the market, some even offering the collection of identity documents at extremely attractive prices, however, the high inflow of fake documentation in the Crypto space puts at stake the accuracy required to satisfy any international regulatory bodies. It is important to understand the level of verification that goes behind every provider to avoid future regulatory problems now.
The AMLD5 has long been looming above the cryptosphere, but little concern was shown until its enforcement announcement sent shockwaves of concern among this sector’s decision-makers.
Only a few KYC companies have taken the time and made the expenditures necessary to adapt beforehand, chief among them is DAO Maker.
By partnering up with KYC3 and predicting the coming regulatory enforcements, DAO Maker has been developing a fully AMLD5-compliant KYC service for over a year now, making them one of the first companies to offer Crypto-centric AMLD5-compliant KYC services. In fact, the company is the first to launch compliant efforts in 2020, which are now integrated within their own Social Mining system, and ready to be deployed across other platforms, including exchanges, marketplaces, DApps, and any other Crypto service.
With the advent of strict KYC/AML compliance regulations, of which AMLD5 is only the most recent and far from the last, cryptocurrency companies are faced with a clear option:
- Adapt, comply, and strive onwards
- Shut down
While Bottle Pay has given up its business and has shuttered, most Crypto companies are likely to opt for option 1. Luckily, it is possible to effectively comply with regulations without tarnishing user experience by working with early adopters of AMLD5 who have managed to execute compliance while not only retaining users, but fostering user growth.