The regulation of cryptocurrency trading is handled differently worldwide with regard to fraud or terrorist financing. This presents both opportunities and risks. The EU is guided by the Fifth Anti-Money Laundering Directive. This ensures trust in the market.
Cryptocurrencies, just like blockchain, are currently being hotly debated in the field of digitization. Numerous studies and experts are of the opinion that these digital currencies will establish themselves in the next few years. The crypto world has already undergone an enormous change in recent years. Since crypto became mainstream, there has been many crypto wallets that raised such as MetaMask (compare other cyrpto wallets vs MetaMask here). At the time of its introduction, the principle was based primarily on anonymity. However, the numerous attempts at fraud and terrorist financing forced the legislators to adopt new regulations. The crypto market itself has also had to adapt to Know Your Customer (KYC) regulations and implement policies to properly screen its users.
EU rules are based on AMLD5
The regulations and laws for dealing with cryptocurrency vary from country to country. The European Union is now increasingly following the AMLD5 (Anti Money Laundering Directive 5). It sets out how money laundering and terrorist financing are to be combated. The current version includes, among other things, a new view of cryptocurrencies, in which the associated exchanges are subject to the same obligations as classic financial institutions. Trading venues must therefore adhere to due diligence and implement KYC processes and AML requirements. They also have to register with national supervisory authorities – in Germany, for example, with Bafin.
While the EU is guided by AMLD5, many markets in Asia and the USA have so far only been partially regulated – or even not at all. China, however, announced a ban on trading cryptocurrencies earlier this year. Brazil, on the other hand, wants to introduce Bitcoin as legal tender just like El Salvador. In the Middle East, Binance – one of the largest crypto trading platforms – has received the first official crypto asset license from regulators in Bahrain and the United Arab Emirates.
Against this background, a significant difference between the states is the respective implementation and processing time. While a corresponding trading license can be issued in the UAE within a few weeks or months, it takes a lot longer via the Bafin in Germany. Nevertheless, Coincube classifies Germany as the most crypto-friendly country, as German banks are increasingly looking for ways to trade crypto assets.
Trust in crypto trading is the be-all and end-all
For a good market position in cryptocurrency trading, trust is essential. Therefore, Europe and Germany pay attention to the implementation of the legal regulations – with a positive effect, as has been shown in the past. For example, companies can rule out identity theft at an early stage and confirm the legitimacy of the business relationship.
However, digital KYC and AML processes bring with them a certain complexity. Users must be identified according to official regulations of the supervisory authorities. Accordingly, the identity document must be compared with a photo or video as well as additional personal information.
There are now officially tested identification procedures, such as video or AI-based solutions, that meet these security requirements. This makes it easier for companies to integrate corresponding methods into their processes. Exactly this procedure is also suitable when trading cryptocurrencies to prevent fraud.
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KYC enables centralization
Traditional finance is centralized and regulations are very local. However, this is different in the crypto market: traders do not have to carry out their KYC processes via a central point. Decentralized finance (DeFi) plays an essential role here. It enables direct interaction with digital products and services – without intermediaries. So-called DeFi protocols support identity providers in KYC processes and help to identify the owner of a crypto wallet. The verified wallets are included in a so-called whitelist and are then considered trustworthy.
For regulations in the crypto market, trust and a harmonized environment are essential. Standardized procedures and guidelines can help here. This also creates greater confidence in the security of the trading venues for the end customer – for example through the AMLD5 in the European market. However, there will certainly be more guidelines and innovations in the field of cryptocurrencies. Companies and retailers should therefore constantly follow the current developments.