KYC in crypto space
Beginning September 2018 ShapeShift’s CEO announced that the company is introducing registration of its clients offering voluntary membership. Currently, ShapeShift’s service is available without any registration and verification. The market participants accepted this news as a threat to anonymity inherent to blockchain and crypto industry and a sign towards AML/KYC compliance.
Crypto-related operations remain largely unregulated, and, thus, the scope of AML/KYC procedures is unclear. There is no widely accepted industry standard either. In the absence of formal requirements, the approach of the market players in crypto industry varies. It depends on how the operations are structured and what internal risk policies are adopted. Businesses offering services without use of fiat currency, so-called “crypto-for-crypto”, tend to adopt more relaxed approach than companies offering crypto exchange service with fiat component. For instance, crypto-for-crypto exchanging platforms operating as merchants usually do not require their customers to undergo customer identification and verification procedures; crypto-for-crypto exchanges which provide such services that potentially may be considered as traditional financial activity (e.g. maintaining client’s accounts, establishing trading limits) usually require their clients to undergo registration and verification of some sort. AML/KYC policies of crypto-for-fiat exchange terminals are more developed and comprehensive. They are driven by financial regulation applicable to banks or payment service providers servicing relevant crypto-for-fiat exchange terminal.
Most regulators (e.g. Singapore financial watchdog, MAS) issued warnings that existing AML regulation is relevant for crypto-related activity and followed “wait-and-see” approach. Few authorities have taken law enforcement actions. One of the examples is US FinCEN which has accused BTC-E and its owner of carrying out virtual currency exchange activities without licence for monetary service business (MSB) and violating anti-money-laundering requirements applicable to MSBs. Crypto-specific amendments to existing AML/KYC laws have been adopted in only one or two jurisdictions. In Europe, Estonia was the first country who pioneered with the crypto-specific amendments to AML rules, followed by the European Union adopting of the amended anti-money-laundering directive.
Given the worldwide nature of crypto-related operations, there is a need to establish a global industry standard and adopt international set of AML/KYC guidelines for crypto companies. This is in line with the recent news about US Financial Action Task Force getting closer to the establishment of a global set of AML standards for cryptocurrencies.
 At the EU level, in July 2016 the European Commission presented a legislative proposal to amend the Fourth Anti-Money Laundering Directive (AMLD)#. It suggested, inter alia, bringing custodian wallet providers and virtual currency exchange platforms within the scope of the AMLD, meaning they would be obligated to fulfill due diligence requirements and have in place policies and procedures to detect, prevent, and report money laundering and terrorist financing. The proposal contains a definition of virtual currencies, which are described as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.” On May 30, 2018, the European Parliament adopted the amendments to AMLD (so called “Fifth Anti-Money Laundering Directive” or “5AMLD”) published in the Official Journal of the European Union on June 18, 2018.# The 5AMLD has entered into force on 9 July, 2018. EU member states are required to implement the 5AMLD by January 10, 2020.
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