Topics covered in this issue:

  1. MiCA and TFR: Crypto regulation and its implementation in Europe 
  2. Crypto regulations: A look ahead to the UK. 
  3. Brazil to offer comprehensive gaming regulations by summer 2023. 

Rayissa Armata head shot with orange and dark blue in the background
KYC Insider March 2023 1

MiCA and TFR: Crypto regulation and its implementation in Europe. 

KYC is nothing new for crypto companies, but the changes affecting the crypto onboarding process are worth considering. Crypto exchanges and wallet providers will need to assess three things: 

  • how suitable customers are for different products, 
  • understand that thresholds for different products and transactions will be introduced,  
  • new actions will be required between centralized and decentralized crypto service providers. 

These new security and transparency requirements within and between European member states will be aligned across the board. 

The European Union’s Market in Crypto-Assets (MiCA) legislation is expected to pass into law by April. The latest delay is only due to translation issues rather than any objections to its content. When the regulation passes, crypto companies will have 18 months to implement the law and its requirements by 2024. 

Regulating crypto has been an ongoing subject with extensive arguments for and against it around the world. Large scale failures, like the FTX saga, further underscore existing gaps in trust within the crypto ecosystem. Proponents of Europe’s comprehensive legislation hope this will enable competition, innovation, and more transparency. It is an ambitious task, and the European Union offers a first model. 

For crypto exchange and custodian companies alike, this is the time to prepare for requirements that will be mandatory and uniform across the EU by next year. While some member states have licensing and crypto regulations in place, there are ample “to-dos” on the check list that take time and significant investment. This warrants the attention of all crypto companies who want to offer their services in the EU. Not only will the EU introduce MiCA, but also its complimentary Transfer in Funds Regulation (TFR). Both MiCA and TFR introduce new requirements and continued obligations to meet Know Your Customer (KYC) requirements.  

For instance, MiCA: 

  • Makes clear to all crypto companies precisely who is to be registered and licensed. 
  • Determines what is “pass-portable” under the licensing regime. 
  • Offers detailed rules and limitations for stablecoin issuers. 
  • Establishes transparency rules for crypto exchanges – including sharing pricing and trade volumes in real time, settling same day trades, and keeping funds that are their own separate from those belonging to clients with no insider trading. 
  • Makes applying for custodial licenses easier by offering more guidance and should take less time to obtain. 

Transfer in Funds Regulation: 

  • Requires Crypto Asset Service Providers (CASPs) as an originator to ensure that KYC data on an end user is collected and complete before any funds are transferred.  
  • Requires both sides of the transfer to verify and store the KYC information and be able to share the data with authorities upon request. This rule, known as the “travel rule”, already exists in traditional finance. 
  • Also requires the application of KYC for transfers between hosted and unhosted wallets with a minimum threshold. An originator CASP must verify that the beneficiary owns the unhosted wallet.   
  • Exemptions remain in place between peer to peer (unhosted wallet holder) transfers; this remains anonymous, and CASPs acting on their own behalf are exempt. 

Travel rule personal identifiable information (PII) data includes:  

  • Originator name  
  • Originator account number when applicable  
  • Originator address 
  • Originator ID number  
  • Originator date and place of birth 
  • Beneficiary name and account number (if applicable)  

Harmonization has not been an easy process for regulators at EU or national levels alike. MiCA promises a comprehensive set of rules that could be a model for the rest of the world. As we all acknowledge, crypto is a global phenomenon that requires greater trust. The EU should not be an isolated use case with barriers. 

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Crypto regulations: A look ahead to the UK. 

The UK economic and finance ministry, HM Treasury (HMT), has proposed a plan for more comprehensive and transparent crypto regulations across the UK. There have been calls for consultation since last April as Phase 1 and Phase 2 of evaluations are now out. Unlike the EU’s set of regulations in the Markets in Crypto Assets (MiCA) and Transfer of Funds (TFR) regulation, the UK approach to regulation is iterative. The first phase included consultation on fiat and stable coins. The second consultation, which was released early February, evaluates best practices to regulate crypto activity and reduce crypto related abuse and terrorist financing. This means regulations will apply to all companies registered in the UK and affect companies offering services “to” the UK. The consultation period is open until the end of April. 

The regulators will implement requirements to strengthen rules for exchange and custodial services beyond registering and performing a simple KYC process to operate in the UK. Regulators are evaluating how to include comprehensive requirements around lending, providing greater transparency on public disclosure information or trading tokens. 

As with any new initiative, the approval processes are lengthy and, in the end, it will require significant investment by all who are licensed to offer their services in or to the UK. For many crypto companies operating around the world, a KYC fulfillment process is already in place either by mandate or to enhance best practices. The new proposal maintains KYC obligations as a fixed design feature of any future legislation.  

As such, there are existing requirements for crypto wallets and exchanges operating in the UK. They must register to operate and fulfil other Anti Money Laundering (AML) requirements, including KYC verification through the Financial Conduct Authority (FCA). With the fall of FTX, the crypto activities will now be more comprehensive on risks, abuse and market impact. A KYC plan is one checklist requirement that can be easily fulfilled by service providers like IDnow who have been operating in the banking and finance arena since 2014. The platform of products and digital identity wallet offer secure, fast and compliant options for the crypto providers and end users alike. 

The UK’s scope on crypto asset requirements differs from the EU MiCA Regulation and includes: 

  • exchange tokens 
  • utility tokens 
  • non-fungible tokens (NFTs) 
  • asset-referenced tokens (ARTs) 
  • commodity-linked tokens 
  • crypto-backed tokens 
  • algorithmic tokens 
  • governance tokens and 
  • fan tokens. 

This new consultation will consider the following crypto activities, which also differs from the MiCA regulation: 

  • Exchange activities 
  • Intermediation activities 
  • Custodial activities  
  • Lending activities  

The goal will be the formation of a uniform framework for crypto activity in the UK and beyond, with some new requirements and some procedures that are already prevalent in anti-money laundering.  

The ability to provide a transparent and inclusive regime relies on a continued close collaboration between public and private sectors. IDnow lauds the focus on greater trust through robust requirements and the ability to contribute with our expertise through this consultation period. 

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Brazil to offer comprehensive gaming regulations by summer 2023. 

The Brazilian government announced that its 2018 gaming regulations will now be implemented by the second half of this year. The new regime will regulate sports betting with new licensing requirements. 

Gaming operators who are seeking to offer compliant products in Brazil will be required to verify the identity of players before accessing the platform. This process is the KYC requirement. KYC not only enables an age verification of players, when a financial relationship is established, authorities will also have access to collect personal data and monitor fraud or other money laundering activities.  

Included in the age verification will be the verification of the Brazilian Cadastro de Pessoas Físicas (CPF), the unique identification number for each user and all bets that are associated with the player. Operators must ensure players are not politically exposed persons or part of any other restricted lists that are associated with criminal money laundering activities.  

Presently, the market is not regulated. This will change and operators who wish to be properly established in Brazil must comply to all licensing requirements, including the KYC mandate. IDnow has been offering its KYC platform of agent-assisted to fully automated solutions including PEP screening since 2014 for banking, finance, iGaming, and other sectors obliged under AML laws. Our experience and products are compliant throughout Europe, EMEA, the UK, and North and South America. KYC is a staple of digital services and will continue to grow as more digital services and products come to market. 

IDnow and Who We Are.

IDnow is a leading identity proofing platform provider in Europe with a vision to make the connected world a safer place. The IDnow platform provides a broad portfolio of identity verification solutions, ranging from automated to human-assisted from purely online to point-of-sale, each of them optimized for user conversion rates and security. 

In order to make the complex world of regulation more accessible, IDnow presents KYC Insider, a free information service on regulatory changes related to Know Your Customer and Digital Identities in Europe. The lead author is Rayissa Armata, Senior Head of Regulatory Affairs at IDnow, and a long-standing expert in the field of regulatory affairs. 

Who is Rayissa Armata?

Rayissa Manning Armata, a native of the San Francisco Bay Area, has more than 15 years experience driving business and regulatory initiatives in a global context. She has represented companies up to Fortune 125 as well as the United Nations. She helped companies drive significant revenue growth – in diverse areas such as fintech, telecommunications, defense, airlines and real estate.

In her role as Senior Head of Regulatory Affairs with identity verification provider IDnow, Rayissa is in close touch with regulators throughout Europe. On KYC Insider she shares this first-hand knowledge with an exclusive network of professionals, who need to stay on top of things in the complex world of regulatory.

Get all information from our previous issues and benefit from our deep knowledge and stay up-to-date on all regulatory changes within financial services, gaming and gambling, telecommunications and many more by subscribing to KYC Insider.

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