Regulation
KYC and AML in MiCA rules: how will crypto evolve in 2025?
Disclosure: The views and opinions expressed herein belong solely to the author and do not represent the views and opinions of crypto.news editorial.
All talk is about the EU Cryptoasset markets, or even MiCA, MiCA and MiCA. This regulatory package, which is not even fully in force yet, is already causing a monumental movement in the blockchain and crypto space. When will it be fully enforceable, what exactly is subject to regulation, and most importantly, how can we prepare for upcoming legislative changes and stay compliant in the brave new world of regulated crypto?
First, when? In June 2024, the European Securities and Markets Authority, in collaboration with the European Banking Authority, will prepare draft delegated acts. At the same time, part of the MiCA regulations will become fully applicable. These parts of the package cover asset-referenced tokens, which include all real-world asset tokenization tokens, as well as stablecoins backed by fiat currencies, because the assets they are referenced to are real currencies. When this happens, all entities involved in commercial operations using asset-referenced tokens will be forced to introduce numerous regulatory measures, such as KYC and AML protocols. The remainder of the regulations will become applicable in December 2024 or January 2025. Regulated entities will include:
- Crypto Asset Service Providers (CASP). Any company that provides services such as exchange services, portfolio management or crypto asset custody will be considered a PSAP. They will be required to incorporate KYC measures when onboarding new users, as well as AML programs that will flag suspicious transactions. One issue we should mention is that many challenges will also be considered PSAPs. MiCA will not apply to the so-called “fully decentralized challenge,” meaning no person or organization actually makes a profit from this endeavor, like Bitcoin. However, “partially centralized challenges” will be considered PSAPs.
- Asset Referenced Tokens transmitters. These companies are already regulated by MiCA rules and must also introduce KYC and AML measures.
The obvious answer is, of course, to introduce KYC and AML measures to remain compliant in the European crypto market. However, this process presents many obstacles, especially for crypto companies.
Developing KYC and AML protocols in-house takes months, if not years, and will cost the company millions of dollars. The biggest banks in the world spend up to $500 million per year on KYC alone, with an average of $50 million. Most crypto companies that already have KYC do so through different KYC providers. Like any other B2B business, a KYC provider does the entire process for you, saving the customer resources and not spending them on a completely new business process. The current market situation shows us that working with a KYC provider is the best solution in terms of optimization. Even the biggest names in the industry, like Binance, Bybit, and Huobi, all use the KYC provider’s services instead of managing them in-house.
Another obstacle specific to the cryptocurrency market is data security. Many people have come to the crypto market because of its built-in anonymity features and lack of KYC. Not necessarily because they finance terrorism or launder money, but simply because they believe in data ownership and don’t want to give away information as sensitive as their home address or ID number to a company third party. It will not be easy to explain the benefits of MiCA rules and KYC/AML practices to this specific audience. So this is a big challenge that crypto companies will have to overcome in order to keep users once the regulations come into full force.
But what are the real benefits of the MiCA rules? Why are they introduced? Is it just because the government wants to control us even more?
I strongly believe that the MiCA rules will have a very positive effect on the European crypto market, allowing it to be competitive with other regions that are actively introducing crypto regulations and allowing it to become the global crypto hub .
First of all, MiCA will replace the current regulations of individual EU countries. Germany, Italy, Spain, France and other countries all have different regulations, with different travel rules, minimum transaction sizes without KYC and many other differences. This leads companies to dedicate additional resources to adapt their KYC and AML processes separately to each legislation. For example, Binance had to leave the Netherlands market due to the inability to obtain the necessary license. With the new MiCA rules covering the entire EU, cases like this will not happen again, since companies will have to comply with a unified standard, making operations in the European crypto market much easier easy and less expensive.
Another important thing to note is that MiCA prohibits things that are obviously dangerous and economically unstable. One of the biggest regulatory changes is the complete ban on algorithmic stablecoins. Simply put, there are two types of stablecoins: currency-backed and algorithmic. Currency-backed stablecoins guarantee their stable price by locking up funds in a 1:1 ratio. In other words, if there is 1,000,000 USDT in the market, Tether will have 1,000,000 USD stuck somewhere, promising to buy back all of that currency with the blocked funds.
Algorithmic stablecoins, on the other hand, use market principles of supply and demand to maintain the target price. If the issuer notices that the stablecoin is losing value, it buys back part of the supply with other tokens. At a high enough scale, the collateral tokens used to redeem stablecoins from the market will also begin to lose value, or the company will burn the collateral tokens, ultimately leading to the company’s inability to withdraw enough stable coins from the market. and both tokens collapse. This is exactly what happened to UST and MOON, the price of the latter having fallen by 99.99%. Algorithmic stablecoins don’t work, and by banning them completely, MiCA regulations better protect investor funds.
Many people in the crypto space are less optimistic about upcoming regulations, and they are right. The implementation of KYC and AML protocols will definitely increase the operating costs of crypto companies and ultimately it will be the users who pay for it. Hiring a KYC provider, storing all the data, and many other additional processes will be expensive, forcing businesses to either cut costs elsewhere or increase their fees and commissions.
Another point to mention is security concerns. If you don’t have user data, it won’t be hacked or leaked. Many users are concerned about their privacy, saying that even traditional financial organizations that have used KYC for decades still fall victim to hacks.
I believe these issues, while very serious, will be mitigated and resolved as the crypto market matures and processes are improved and tested. Fair and clear regulations are obviously the future of the crypto market, and 2025 will be incredibly challenging and interesting for all crypto users.
Alexandre Ray
Alexandre Ray is the CEO and co-founder of Albus Protocol, a regulatory-compliant challenge framework for public blockchains, and JFactory, a Swiss company specializing in the development of decentralized financial technologies. Alexander is a technology executive and entrepreneur with over 20 years of experience developing infrastructure, cloud and data-driven solutions for European businesses. Working for companies such as Deutsche Bank Frankfurt and General Electric as a software architect and development manager, Alexander has been involved in the design and development of models for forecasting regulatory risks and financial figures, giving him insight deeper insight into algorithms and challenge instruments from an ancient financial perspective. .