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Digital Assets: Becoming Regulation Aware for 2021

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The key to successfully harnessing growth in the digital asset industry is through adopting regulation early on.

It should not be breaking news to anyone that the digital asset market is developing rapidly. With crypto assets becoming ever more commonplace, opportunity derived from crypto assets has never been more significant, and this is reflected in the demand of consumers, and firms looking to provide digital asset products.

Institutional investors now beginning to enter the market will only cause the growth momentum to accelerate. The likes of J.P. Morgan, Standard Chartered and Northern Trust, to name a few, have all made bold moves to enter and capitalise on this growing market.

The retail utilisation of crypto assets, too, has seen a stark increase in popularity. The number of accounts opened at crypto exchanges was estimated to have hit 191 million, consisting of 101 million unique users, in the second half of 2020. Consumers no longer see digital assets as just a “hype”.  

The Increasing Emphasis on Regulation

As digital assets become ever more entrenched in global financial markets, regulators are increasing their focus. More robust digital asset regulations are expected to be launched in the near future, as regulators look to maintain market trust, fairness and transparency to support the rapid growth the digital assets industry is experiencing.

Each country is in the process of firming up its regulatory response to support the vast demand for digital assets.

Currently, the FCA only holds security and e-money tokens under its regulatory perimeter.

However, further global developments include the EUs plans to implement the new Markets in Crypto Assets (“MiCA”) regulation by 2024, poised to be a game-changing regulation having operational impacts across the entire European digital assets industry’s value chain. Its framework provides legal certainty for crypto assets not currently covered by existing EU legislation and establishing uniform rules across the EU for service providers and issuers.

AML Requirements for the Crypto Asset Industry – The Global Common Denominator

There remains relative uncertainty around the global digital asset regulatory landscape, as it continues to evolve swiftly. However, one common denominator is bringing all market players to the table – the requirement to abide by the AML Regulations.

As of January 2020, Crypto assets wallets and providers are now considered regulated entities under the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 and subject to AML rules and regulations and is being implemented in the UK via the FCA Cryptoasset Registration process.

The introduction of AML regulations has not negatively impacted the industry, as evidenced by the continual growth of the crypto asset sector, despite the initial feedback expressed by providers fearful of client reaction to collecting additional personal information.

Based on Delta Capita’s experience in the digital asset community, companies have been pro-active in adapting to the AML regulations in 2020 and preparing for 2021 and beyond. The biggest challenge is the implementation of operational processes that can meet the regulatory requirements for both existing and new clients in a cost effective and efficient way. This presents the blueprint for a successful approach to riding the wave of the crypto asset industry’s expansions; ensuring that your firm remains on-top of the regulatory changes on the horizon.

DC’s Involvement in the Crypto Asset Marketplace

Delta Capita has been working with crypto asset providers through the transition to regulated status. With Delta Capita’s dedicated AML Policy team, we have worked to influence client policy changes to assist in adhering to both global and local jurisdiction requirements. Through our end-to-end Client Lifecycle Managed Service, we have partnered with clients to enhance their operational processes and procedures to achieve an optimal operating model while improving the overall client journey. Throughout 2020, we have conducted KYC uplift and remediation projects for a wide range of financial institutions to ensure client portfolios are compliant with the new AML requirements, leading to some clients considering and transitioning to our KYC managed service. Through operational leverage and technology cost mutualisation, the efficiencies coming from managed services have offered material CapEX/OpEx savings leading to reductions of up to 40%.

Delta Capita continues to partner with clients to provide key insights across the digital asset regulatory landscape ranging from the ‘now requirements’ like AML to requirements on the horizon such as MiCA.

Get in touch to speak to our specialised SMEs and technologists who are building cutting edge solutions for our clients.

Contributors: Karan Kapoor – Head of Regulatory Change and Technology, David Long – Chief of Staff and Head of Non-Financial risk, Ana Arxer – Head of Global CLM Sales, Gideon Ezra – Graduate Consultant