Opinion Anticipating Cryptos Transformation in 2025 with KYC and AML Embedded in MiCA Regulations

Please note that the views and opinions expressed in this article are solely those of the author and do not reflect the views and opinions of the editorial team at crypto.news.

All the discussions revolve around the European Union’s Markets in Crypto-Assets (MiCA) regulations. This regulatory package, even before its full implementation, is already causing significant disruptions in the blockchain and cryptocurrency space. When will it be fully applicable, what falls under its regulations, and most importantly, how can businesses prepare for the upcoming legislative changes and ensure compliance in this new world of regulated crypto?

Let’s start with the timeline. In June 2024, the European Securities and Markets Authority, in collaboration with the European Banking Authority, will draft Delegated Acts. At the same time, certain aspects of the MiCA regulations will come into effect. These specific parts of the package will cover asset-referenced tokens, which include tokens representing real-world assets, as well as fiat-backed stablecoins, as they are tied to real currencies. Once this happens, all entities engaged in business operations involving asset-referenced tokens will be required to implement various regulatory measures like Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols. The remaining regulations will come into effect either in December 2024 or January 2025. The entities subject to regulation include:

1. Crypto Asset Service Providers (CASPs): Any company offering services such as exchange, wallet management, or custodial services for crypto assets will be classified as a CASP. They will be obligated to incorporate KYC measures during user onboarding and implement AML programs to report suspicious transactions. It’s worth mentioning that many decentralized finance (defi) platforms will also fall under the CASP category. MiCA regulations will not apply to “fully decentralized defi” platforms where no person or organization profits from the enterprise, such as Bitcoin. However, “partly centralized defi” platforms will be considered CASPs.

2. Asset-Referenced Tokens issuers: These companies are already regulated by the MiCA rules and must implement KYC and AML measures.

Now, let’s discuss how businesses can prepare for the MiCA regulations. The obvious answer is to introduce KYC and AML measures to ensure compliance in the EU crypto market. However, this process poses several barriers, especially for crypto companies.

Developing in-house KYC and AML protocols takes months, if not years, and requires significant financial resources. Major banks worldwide spend up to $500 million annually solely on KYC, with an average expenditure of $50 million. Many crypto companies already utilize the services of external KYC providers to streamline the process. Similar to other business-to-business (B2B) arrangements, a KYC provider handles the entire process, allowing clients to save resources and avoid building an entirely new business process. The current market trend indicates that opting for a KYC provider is the most optimized approach. Even industry giants like Binance, Bybit, and Huobi rely on the services of KYC providers instead of managing it internally.

Another obstacle specific to the crypto market is data security. Many individuals entered the crypto market because of its inherent anonymity features, avoiding the need for KYC. This is not necessarily because they are involved in illicit activities, but rather because they value data ownership and are reluctant to share sensitive information like their home address or identification number with third-party companies. Explaining the benefits of MiCA rules and KYC/AML practices to this particular audience will be challenging, and crypto companies will need to overcome this hurdle to retain users once the regulations are fully enforced.

Now, let’s consider the impact of the new regulations on the market. What are the actual advantages of the MiCA rules? Are they being introduced solely for increased government control?

I firmly believe that the MiCA rules will have a highly positive impact on the EU crypto market, transforming it into a competitive player alongside other regions that are actively implementing crypto regulations and positioning it as a global crypto hub.

Firstly, MiCA will replace the existing regulations in different EU countries. Currently, countries like Germany, Italy, Spain, France, and others have their own unique regulations, including travel restrictions, minimum transaction sizes for no-KYC transactions, and various other differences. Consequently, companies must allocate additional resources to adapt their KYC and AML processes to comply with each jurisdiction separately. For instance, Binance had to withdraw from the Netherlands market due to the inability to obtain a necessary license. With the new MiCA rules encompassing the entire EU, such cases will no longer occur, as companies will need to adhere to a unified standard, simplifying and reducing the costs of operating within the EU crypto market.

Another crucial aspect is that MiCA prohibits inherently risky and economically unstable practices. One notable change brought about by the regulations is the complete ban on algorithmic stablecoins. In simple terms, there are two types of stablecoins: currency-backed and algorithmic. Currency-backed stablecoins maintain a stable price by holding equivalent funds in a 1:1 ratio. For instance, if there are 1,000,000 USDT in circulation, Tether will have 1,000,000 USD locked away, guaranteeing the ability to redeem all the stablecoins with the locked funds.

On the other hand, algorithmic stablecoins rely on supply and demand principles to maintain their target price. If the issuer observes that the stablecoin is losing value, they buy back some of the supply using other tokens. If this process is scaled up significantly, the collateral tokens used to purchase stablecoins from the market will also start losing value, or the company will exhaust its collateral tokens, leading to an inability to retrieve enough stablecoins from the market and causing both tokens to collapse. This is precisely what happened with UST and LUNA, with the latter experiencing a 99.99% price decline. Algorithmic stablecoins are fundamentally flawed, and by completely banning them, MiCA regulations better safeguard investors’ funds.

Many individuals in the crypto space are less optimistic about the upcoming regulations, and they have valid concerns. Implementing KYC and AML protocols will undoubtedly increase the operational costs for crypto companies, ultimately borne by the users. Hiring a KYC provider, storing sensitive data securely, and managing additional processes will be expensive, forcing companies to either cut costs elsewhere or raise fees and commissions.

Data security is another point worth mentioning. If user data is not collected, it cannot be hacked or leaked. Many users prioritize their privacy and argue that even traditional financial institutions with decades of KYC experience still fall victim to cyber attacks.

I believe that while these challenges are significant, they will be mitigated and resolved as the crypto market matures and processes are refined and tested. Clear and fair regulations are undoubtedly the future of the crypto market, and 2025 will be an extremely challenging and fascinating year for all crypto users.

Read more:
The European Union’s Data Act effectively renders true smart contracts illegal.

About the Author:
Alexander Ray is the CEO and co-founder of Albus Protocol, a regulatory-compliant defi framework for public blockchains, and JFactory, a Swiss company specializing in decentralized finance technology. With over 20 years of experience in developing infrastructure, cloud-based solutions, and data-driven technologies for European businesses, Alexander brings extensive expertise to the field. Having worked for renowned companies like Deutsche Bank Frankfurt and General Electric as a software architect and development lead, he possesses a deep understanding of defi algorithms and instruments from a traditional finance perspective.