co-authored by Sascha Steinbach-Vulin and Laetitia Nvoué
The Markets in Crypto-Assets (MICA) represents one of the first and widest crypto compliance focusing on the provision of regulatory transparency and stability. This regulation will have an impact on both crypto users and providers. Dealing with these regulatory adaptations and being prepared businesswise will be crucial for the upcoming years.
The blockchain technology is indispensable in today’s world. In this context, so-called digital assets repeatedly make the headlines. In recent years, services related to blockchain and cryptocurrencies have attracted increasing attention on the financial markets. This was partially caused by controversial public discussions.
Cryptocurrencies are based on blockchain technology. Blockchain technology involves a block system that stores transactions. Individual transactions are thus combined in blockchains. Blockchains ensure the secure use of transaction-based technology solutions while reducing potential manipulation. In case a particular block of the chain is cracked, all previous blocks need to be changed. Based on the necessary computing power to conduct such an act this is quite unlikely and makes the technology secure.
Crypto currency criticism
A prominent point of criticism that is often discussed is a perceived technology intransparency. In fact that raises a number of unanswered questions among regulators regarding appropriate regulatory measures. BaFin assumes that payment and value asset service providers are increasingly exposed to money laundering risks. Hence, constantly increasing business relationships with customers within these industries result in a high vulnerability to money laundering risks. They must be detected and reported to the Financial Intelligence Unit in the event of suspicious transactions. Due to strong global interconnections and a diverse product range, the tracing of beneficial owners in transactions is pursued.
Regulators and their response to the raise of the crypto market
With a huge public interest in blockchain technology, the European Union implemented the Fifth Anti-Money Laundering Directive (5AMLD) for the first time in 2018 to establish more security in the use of cryptocurrencies and to achieve crypto compliance. There must now be eKYC processes in place at crypto service providers, where customers require identification and verification when purchasing cryptocurrency. This allows existing transactions to be monitored and suspicious transactions to be forwarded to the FIU. The aim of the regulatory ordinance is to protect the market for cryptocurrency from money laundering and financial crime activities.
The EU has introduced the MiCA regulation achieve crypto compliance
In addition, the EU has introduced the MiCA regulation, which aims to create a single regulatory framework for cryptocurrencies across the European Union. This will expose crypto service providers to the generally applicable regulatory requirements and provide customers stronger protection. Only by complying to existing regulatory requirements can crypto service providers obtain a licence to provide their services.
Due to an existing lack of transparency and potential abuse of such networks, such as illegal transactions, the financial supervisory authorities have placed a higher focus on this topic. The authorities also announced that they will intensify the supervision of money laundering prevention and conduct at least 75 special examinations in 2023. BaFin has also found that many institutions are not sufficiently supervised. Therefore, in its paper “Risks in the focus of BaFin 2023“, BaFin announces that due to a high risk of money laundering in the financial sector (major banks and branches, etc.), audits of outsourcing companies in accordance with the “Act to strengthen financial integrity” (FISG) will be conducted. In this way, crypto investors shall be protected financial stability preserved and innovations in the industry promoted.
The future of crypto compliance
Ultimately, EU regulations are designed to make the use of cryptocurrencies safer and more reliable while, at the same time, mitigating both money laundering and financial crime activities.
Gerardo Salonia is a senior principal within our financial services practice in Germany with a focus on compliance, AML and KYC areas. He has extensive consulting experience within the e-commerce and financial services domain. Gerardo has enabled several European companies and financial institutions to overcome the challenges posed by disruptive technologies and transform into digital-oriented organizations. Gerardo holds an MBA in business administration from the University of Mannheim. He is a certified AML officer and has a risk management certification from the Goethe Business School – Frankfurt University.
Sascha Steinbach-Vulin is an experienced Senior Consultant within the financial services industry, particularly within the field of AML Compliance. During his engagements at various large German banks, he could gain valuable insights regarding financial institutions´ AML landscapes while focusing strongly on transaction monitoring and case management procedures. In so doing, Sascha has been successfully supporting large bank clients in several transformation and optimization initiatives to achieve cost reductions and improve overall AML alert handling and case management efficiencies. Sascha holds an MA in International Management from the International School of Management Frankfurt am Main.
Laetitia Nvoue is a senior Consultant within our financial services with the focus in AML, CDD, KYC, Compliance Regulations, Sanctioning and Crypto. She gained practical backgrounds in KYC and Compliance Services in big international Banks and investment banking. Laetitia knows a large and diverse banks portfolio in KYC and AML Regulations. She holds a master´s degree in International Global, Transnational and Governance from the Ruhr University Bochum, in Bochum.