RegTech for Digital Assets
The RegTech Map for Digital Assets reveals the technology service providers offering solutions, addressing different legal and regulatory requirements in digital assets realm:
As the distributed ledger technology is further evolving and maturing, more and more of new applications and solid use cases outpace cryptocurrencies, which in-turn require more laws and regulations to be applied. While many early Initial Coin Offerings (ICO) have failed to comply with regulations, reputational and regulatory consequences such as enforcement procedures have shown that there is no more “wild west” in the area of digital assets. Although non-compliance costs nearly three times as much as compliance does, compliance solutions must be cost-effective. In addition, business models in the digital asset space bear inherent risks due to several factors such as using digital channels only or being used as a means of payments, leveraging technology to meet regulatory requirements is an ideal RegTech use case for digital offerings:
1. Know your Customer (KYC)
KYC is one of the main pillars in Anti Money Laundering (AML) framework and stipulates the requirements for the verification of the identity of client to ensure that they are not involved in money laundering, terrorist financing, corruption or bribery. Part of the KYC is also the identification of clients as a PEP (politically exposed persons) as such person generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold.
2. Source of Funds (SOF)
The source of funds is another key requirement in AML frameworks and is referring to the origin of the particular funds or assets to establish the fund’s origin and the method/circumstances under which the funds were acquired. While in traditional fiat world SOF in general are backed by documents, the distributed ledger technology allows a so-called chain analysis to investigate the transfer of assets.
3. Security Tokens
Initial issuance and secondary market trading of securities are in most jurisdictions subject to specific legal and regulatory requirements, often in combination with AML requirements.
4. Tax Compliance
While cryptocurrenices and other digital assets are designed for global use, tax authorities are imposing regulations in their own jurisdictions treating digital assets not in an unified way with regard to legal qualification and taxation.
Other legal and regulatory requirements which have been designed for traditional services and products such as investor risk profiling, trade surveillance and market risk in capital markets, or the monitoring of employees’ digital asset activity.