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Crypto Compliance - Definition and Meaning

Written by Pythagoras Blog Team | Apr 12, 2024 3:11:58 PM

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Digital currencies such as Bitcoin, Ethereum, Tether, Binance Coin, and Ripple are increasingly gaining importance. Compliance adherence also plays a crucial role for these. We explore how Crypto Compliance shapes the development and influence of leading digital currencies. Which regulatory frameworks particularly challenge digital currencies, and what steps are necessary for them to meet both legal and operational standards?

What is Crypto Compliance?

Crypto Compliance particularly focuses on wallets - virtual wallets in the form of apps used for storing and conducting transactions with cryptocurrencies like Bitcoin. A major problem with crypto transactions is their difficult controllability, which makes them susceptible to abusive activities. Therefore, reputable cryptocurrency companies and investors are increasingly welcoming regulations and compliance rules.

Since the surge in Bitcoin's value after 2017 and the emergence of additional cryptocurrencies, interest in this new asset class has grown. Simultaneously, new FinTechs and trading venues have developed. Initially, financial regulatory authorities worldwide reacted hesitantly, but as suspicions of money laundering and fraud in the crypto industry increased, calls for stronger regulation grew.

What the EU and the DACH region require in terms of Crypto Compliance

Almost all countries have now addressed the issue and are beginning to develop rules for trading cryptocurrencies.

EU:

In the EU, the guidelines for services related to cryptocurrencies are encapsulated in MiCAR (Markets in Crypto-Assets Regulation). The regulation, adopted by the European Parliament in April 2023, imposes strict regulatory requirements on issuers of crypto-assets and service providers who trade on secondary markets. The measures and procedures include, among others:

  • Anti-Money Laundering requirements (AML).
  • Know-Your-Customer procedures (KYC).
  • Tax reporting.
  • Compliance with securities laws.
Germany 
In Germany, the Federal Financial Supervisory Authority (BaFin) oversees the implementation of the European MiCAR rules into national law and is authorized to take direct action against unauthorized activities.

Switzerland

In Switzerland, the handling of cryptocurrencies is based on the Basel Framework Agreement, which has been developed since 1975 by the Basel Committee on Banking Supervision (BCBS). Since 2019, the existing guidelines have been expanded to include the new asset class of crypto-assets. Banks that deal with crypto-assets must:

  • conduct adequate checks, as they have a duty of diligence.
  • adapt governance and risk management to the increased risks.
  • improve transparency and disclosure.
  • meet very high capital requirements when offering services with cryptocurrencies.
Austria

In Austria, trading in cryptocurrencies and the associated compliance are regulated by the Financial Market Authority (FMA). The main requirements include:

  • Mandatory registration for crypto-asset service providers
  • Compliance with AML (Anti-Money Laundering) guidelines
  • Reporting and transparency requirements

Significance of Crypto Compliance

The increasing spread and acceptance of cryptocurrencies such as Bitcoin and Ethereum make it essential for businesses and governments to understand and adhere to applicable laws and regulations. Crypto compliance is a crucial aspect in relation to cryptocurrencies and blockchain technology.

Compliance with legal regulations is essential for the success of cryptocurrency companies, as violations can lead to penalties and loss of trust. Therefore, it is important to always stay informed about the latest regulatory developments and best practices in the field of crypto compliance.

Automation and Technology in Crypto Compliance

Given the rapidly growing market and the increasing number of new cryptocurrencies, it is becoming increasingly difficult for even experienced cryptocurrency service providers to keep track. A lack of personnel resources can lead to suspicious transactions being overlooked or detected too late, which poses the risk of losses and can damage the company's reputation. Automated solutions are therefore essential for efficiently managing crypto compliance processes. Transaction Monitoring and Transaction Screening are exemplary tools that allow for complete automation of the crypto compliance management.
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