KYC and AML in MiCA rules: how will crypto change in 2025?

All the talks are about the EU’s markets in crypto-assets, or again MiCA, MiCA and MiCA. This regulatory package, which is not even fully in effect yet, is already causing monumental movement in the blockchain and crypto space. When will it fully apply, what exactly is subject to the regulations, and most importantly, how to prepare for the upcoming legislative changes and comply with the brave new world of regulated crypto?

First, when? In June 2024, the European Securities and Markets Authority, together with the European Banking Authority, will prepare a draft of delegated laws. At the same time, part of the MiCA regulations will become fully applicable. These parts of the package cover asset-referenced tokens, which include all real-world asset tokenization tokens, and fiat-backed stablecoins, because the assets referenced are real currencies. When this happens, all entities involved in business operations using asset reference tokens will be obliged to put in place many regulatory measures, such as KYC and AML protocols. The rest of the regulations will come into force in December 2024 or January 2025. The entities regulated will include:

Crypto Asset Service Providers (CASPs). Any company that provides services such as exchange, wallet management or custody services for crypto-assets will be considered a CASP. They will be required to integrate KYC measures when onboarding new users, as well as AML programs that will report suspicious transactions. A catch we should mention is that many defi will also be considered CASPs. MiCA will not apply to so-called “fully decentralized defi”, meaning that no person or organization actually profits from that venture, such as Bitcoin. However, “partially centralized defi” will be considered CASPs. Asset-Reference-Tokens Issuers. These companies are already regulated by the MiCA rules and must also put in place KYC and AML measures.

The obvious answer, of course, is to introduce KYC and AML measures to stay connected to the EU crypto market. However, this process has many obstacles, especially for crypto companies.

Developing KYC and AML protocols in-house takes months, if not years, and will set the company back millions of dollars. The largest banks in the world spend up to $500 million annually on KYC alone, with an average of $50 million. Most of the crypto businesses that already have KYC are doing so through different KYC providers. Just like any other B2B company, a KYC provider does the entire process for you, allowing the client to save resources and not spend them on a completely new business process. The current market situation shows us that going to a KYC provider is the best way in terms of optimization. Even the biggest names in the industry, such as Binance, Bybit and Huobi, all use the KYC provider’s services instead of managing it in-house.

Another barrier specific to the crypto market is data security. Many people have come to the crypto market because of its built-in anonymity features, not having to undergo KYC. Not necessarily because they finance terrorism or launder money, but simply because they believe in data ownership and do not want to give such sensitive information as their home address, or identification number, to a third party company. Explaining the benefits of MiCA rules and KYC/AML practices to that particular audience will not be easy, so this is a major challenge that the crypto companies will have to overcome to retain the users after the regulations is in full force.

But what are the real benefits of the MiCA rules? Why are they introduced? Is it just because the government wants to control us even more?

I strongly believe that the MiCA rules will have a very positive effect on the EU crypto market, enabling it to be competitive with other regions that are actively introducing crypto regulations and enabling it to become the global crypto hub become

First, MiCA will replace the current regulations of different EU countries. Germany, Italy, Spain, France and other countries all have different regulations, with different travel rules, minimum sizes of no-KYC transactions, and many other differences. This results in companies devoting additional resources to separately adapting their KYC and AML processes to each and every piece of legislation. For example, Binance had to leave the Dutch market because it could not get a necessary license. With the new MiCA rules covering the entire EU, cases like this will not happen again, as the companies will have to comply with a unified standard, making it much easier and cheaper to operate within the EU crypto market.

Another important thing to note is that MiCA prohibits things that are obviously dangerous and economically unstable. One of the biggest changes the regulations will bring is the total ban on algorithmic stablecoins. In simple words, there are two types of stablecoins: currency-backed and algorithmic. Currency-backed stablecoins ensure their stable price by having funds in a 1:1 ratio. In other words, if there is 1,000,000 USDT on the market, Tether will have 1,000,000 USD locked up somewhere, promising to buy back all that currency with the locked up funds.

Algorithmic stablecoins, on the other hand, use supply and demand market principles to hold the target price. If the issuer sees the stablecoin losing value, it buys out part of the supply with some other tokens. Scale high enough, and the collateral tokens used to buy the stablecoins out of the market will also start to lose value, or the company will burn through the collateral tokens, eventually resulting in the company not having enough stablecoins from the market cannot take, and both signs collapse. This is exactly what happened to UST and LUNA, with the latter dropping 99.99% in price. Algorithmic stablecoins don’t work, and by banning them entirely, MiCA regulations better protect investors’ funds.

Many people in the crypto space are less optimistic about the upcoming regulations, and they have their points. The implementation of KYC and AML protocols will definitely increase the operating costs of the crypto companies, and in the end, it will be users who pay for it. Hiring a KYC provider, storing all the data and many more added processes will be expensive, forcing the companies to either cut costs elsewhere or increase their fees and commissions.

Another point to mention is the security issues. If you don’t have users’ data, it won’t be hacked and leaked. Many users are concerned about their privacy, arguing that even the traditional financial organizations that have had KYC for decades still fall victim to hacks.

I believe that these problems, while very serious, will be mitigated and resolved as the crypto market matures, and processes are improved and tested. Fair and clear regulations are obviously the future of the crypto market, and 2025 will be incredibly challenging and interesting for all crypto users.