regulation

Zero-knowledge KYC could solve the privacy vs compliance conundrum — VC partner

Zero-knowledge Know Your Customer (KYC) would allow businesses to adhere to strict AML/CTF rules while ensuring customer privacy.

As the Web3 industry matures, zero-knowledge Know Your Customer (zkKYC) is becoming more widely discussed as a means to comply with strict financial regulations while maintaining user privacy, according to the partner of a venture capital firm.

In an interview with Cointelegraph, John Henderson, partner at Australian-based venture capital firm Airtree Ventures, said the successful implementation of a zkKYC system would be “great news for both regulators and consumers” and could increase cryptocurrency adoption:

“Institutions and retail users are more likely to participate in DeFi if they can be confident that they are complying with their AML/CTF obligations.”

Henderson explained a zkKYC system would allow users to prove certain things about themselves to service providers without having to divulge personally identifying data such as their names or identification documents.

In theory, the sharing of that information would be enough to satisfy Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulatory requirements placed on the crypto industry:

“[The system] involves a trusted third party validating my personal information and then issuing a cryptographic proof to my personal wallet, which I could then choose to share, or share attributes of, with financial service providers.”

The benefit of such an approach is that no personally identifying information could be leaked in the event of a security breach of a service provider such as a crypto exchange, Henderson claims, with the identification documents only recoverable when required by authorities.

Many in the crypto community have been critical of the way their personally identifiable information has been handled by some crypto platforms.

Recently, the community shared their concerns after court documents published on Oct. 5 publicly disclosed the personal information and transaction history of thousands of Celsius customers, with some warning they could be used to dox users.

Calls to improve privacy for individuals were also loudly sounded at the September Converge22 conference in San Francisco. 

Jeremy Allaire, CEO of stablecoin issuer Circle, expressed the need for “advancements” in technologies that prove identities and credentials while simultaneously ensuring individuals’ privacy.

Related: Are decentralized digital identities the future or just a niche use case?

Henderson however admitted that “storage of sensitive information is still an unsolved problem,” sharing two ideas on how the management of such information could take place:

“One idea would be to have trusted entities hold identity documents off-chain and port proof of identity on-chain, without the original documents. Another idea is to sign a wallet transaction with a regulatory institution, who would then register that account with an identity.”

Despite the challenge, Henderson was adamant a zkKYC protocol will form the “building blocks of on-chain reputation scores” allowing “more useful” financial products and services.

“My priority is onboarding the next hundred million users to crypto,” he said, “If we want to achieve internet scale, we need a solution for AML/CTF compliance.”

Airtree Ventures led a $4.7 million seed round into ReputationDAO on April 13, a decentralized autonomous organization that aims to provide a financial reputation and identity service for decentralized finance (DeFi).

OECD releases framework to combat international tax evasion using digital assets

The OECD said it planned to present the Crypto-Asset Reporting Framework to a meeting of G20 finance ministers and central bank governors on Oct. 12-13.

The Organisation for Economic Cooperation and Development, or OECD, has published a framework aimed at having tax authorities achieve greater visibility on crypto transactions and the users behind them.

In an Oct. 10 announcement, the OECD said it planned to present the Crypto-Asset Reporting Framework, or CARF, to a meeting of G20 finance ministers and central bank governors on Oct. 12-13. The crypto tax framework proposed automatically exchanging information on crypto transactions between jurisdictions annually, given a rise in the number of unregulated exchanges and wallet providers.

According to the OECD, the lack of transparency in not having crypto transactions fall under the group’s and G20’s Common Reporting Standard, or CRS, increases “the likelihood of their use for tax evasion.” The framework will include carve outs for “assets that cannot be used for payment or investment purposes” and those already required for reports under the CRS.

“Today’s presentation of the new crypto-asset reporting framework and amendments to the Common Reporting Standard will ensure that the tax transparency architecture remains up-to-date and effective,” said OECD secretary-general Mathias Cormann.

The announcement added:

“The CARF will target any digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions […] Entities or individuals that provide services effectuating exchange transactions in crypto-assets for, or on behalf of customers would be obliged to report under the CARF.”

Related: Which countries are the worst for crypto taxation? New study lists top five

Developed as the result of an April 2021 mandate from the G20, the CARF framework requires reporting on the type of cryptocurrency as well as the type of digital asset transaction — whether through an intermediary or service provider. In August, the OECD approved amendments to the CRS including bringing central bank digital currencies (CBDCs) under the scope of its reporting.

If approved, the framework would likely facilitate information sharing on crypto transactions between the OECD’s 38 member countries — a list which includes the United States, Japan, South Korea and many nations within Europe.

European Parliament Committee passes MiCA crypto framework in landslide vote

Members of the committee passed the crypto framework policy in a vote of 28 in favor and one against, with a final vote expected with the full Parliament soon.

Policymakers with the European Parliament Committee on Economic and Monetary Affairs, or ECON, have approved the Markets in Crypto-Assets framework following a vote from the European Council.

In an Oct. 10 tweet, ECON member Stefan Berger confirmed the committee had accepted the MiCA legislation, a result of trialogue negotiations between the EU Council, the European Commission and the European Parliament. Members of the parliamentary committee passed the crypto framework policy in a vote of 28 in favor and one against, with a final vote expected in a full European Parliament session soon.

The MiCA proposal, first introduced to the European Commission in September 2020, aims to create a consistent regulatory framework for cryptocurrencies among the 27 European Union member states. Following legal and linguistic checks, Parliament approving the latest version of the text, and publication in the official EU journal, the crypto policies could go into effect starting in 2024.

“It is important to ensure that the [European] Union’s financial services legislation is fit for the digital age, and contributes to a future-ready economy that works for the people, including by enabling the use of innovative technologies,” said the MiCA text as of Oct. 5.

Related: MiCA and ToFR: The EU moves to regulate the crypto-asset market

Following the MiCA vote, members of the EU Parliament also overwhelmingly approved a provisional deal on the Transfer of Funds Regulation — legislation aimed at having compliance standards for crypto assets in an effort to crack down on money laundering. The two regulatory frameworks, if given final approval, would apply to member states with the EU but potentially serve as an example for global lawmakers on crypto.

More than 30% of Canadians plan to purchase crypto by 2024, says OSC head

Ontario Securities Commission CEO Grant Vingoe said the regulator planned to release a report in October which included crypto adoption rates in Canada.

Grant Vingoe, chief executive officer of the Ontario Securities Commission, reiterated the regulator’s technology-neutral stance on crypto while saying many Canadians planned to become HODLers in the near future.

In a keynote address before the Economic Club of Canada on Oct. 6, Vingoe said the regulatory fundamentals of stocks and bonds were equally applicable to crypto contracts, with the “vast majority of crypto-based entities” falling within the OSC’s jurisdiction. According to the OSC head, the regulator largely considered Bitcoin (BTC) and Ether (ETH) to be commodities, while “arrangements that trading platforms have with investors” constituted securities.

“As securities regulators, none of the characteristics of crypto assets or their underlying technology, either positive or negative, drives our regulatory approach,” said Vingoe. “We are not here to pick winners and losers among investments. We take a careful and technology-neutral approach to all new products that come into our market, and we apply the same reasoning in assessing them.”

He added that the growing crypto market becoming interconnected to the financial system potentially posed a concern, citing the collapse of digital asset exchange QuadrigaCX:

“We know from our own research (being published later this month) that more than 30 per cent of Canadians plan to buy crypto assets in the next year […] It is a challenge to bar non-compliant firms from offering services in Canada. With a limited budget and finite Enforcement staff to cover our entire capital markets, there is only so much we can do. But we are making progress.”

Related: Cleaning up crypto: How much enforcement is too much?

The Canada-based regulator has taken enforcement actions against crypto firms Bybit and KuCoin, largely claiming violation of securities laws and operating unregistered crypto asset trading platforms. As of Aug. 15, 9 companies are listed as registered crypto businesses under the OSC, including Fidelity Digital Assets, Newton Crypto, and Bitbuy.

More than 30% of Canadians plan to purchase crypto by 2024 — OSC head

Ontario Securities Commission CEO Grant Vingoe said the regulator planned to release a report in October which included crypto adoption rates in Canada.

Grant Vingoe, CEO of the Ontario Securities Commission, reiterated the regulator’s technology-neutral stance on crypto while saying many Canadians planned to become hodlers in the near future.

In a keynote address before the Economic Club of Canada on Oct. 6, Vingoe said the regulatory fundamentals of stocks and bonds were equally applicable to crypto contracts, with the “vast majority of crypto-based entities” falling within the OSC’s jurisdiction. According to the OSC head, the regulator largely considered Bitcoin (BTC) and Ether (ETH) to be commodities, while “arrangements that trading platforms have with investors” constituted securities.

“As securities regulators, none of the characteristics of crypto assets or their underlying technology, either positive or negative, drives our regulatory approach,” said Vingoe. “We are not here to pick winners and losers among investments. We take a careful and technology-neutral approach to all new products that come into our market, and we apply the same reasoning in assessing them.”

He added that the growing crypto market becoming interconnected to the financial system potentially posed a concern, citing the collapse of digital asset exchange QuadrigaCX:

“We know from our own research (being published later this month) that more than 30 per cent of Canadians plan to buy crypto assets in the next year […] It is a challenge to bar non-compliant firms from offering services in Canada. With a limited budget and finite Enforcement staff to cover our entire capital markets, there is only so much we can do. But we are making progress.”

Related: Cleaning up crypto: How much enforcement is too much?

The Canada-based regulator has taken enforcement actions against crypto firms Bybit and KuCoin, largely claiming violation of securities laws and operating unregistered crypto asset trading platforms. As of Aug. 15, nine companies are listed as registered crypto businesses under the OSC, including Fidelity Digital Assets, Newton Crypto and Bitbuy.

South Korean judge dismisses warrant for individual involved in Terra collapse: Report

In his decision to dismiss the warrant, the judge reportedly considered that Yoo Mo had a residence and family ties in South Korea and was already barred from leaving the country.

The warrant for Yoo Mo, the head of the business team of Terraform Labs, has reportedly been dismissed less than 48 hours after it had been issued.

According to an Oct. 6 report from South Korea’s Yonhap News Agency, Judge Hong Jin-Pyo of the Seoul Southern District Court said it was difficult to see the “necessity and significance” of arresting Yoo. The prosecutor’s office in the same jurisdiction reportedly issued a bench warrant for the Terraform Labs executive on Oct. 5 for charges that included violating the Capital Markets Act and fraud by manipulating the price of TerraUSD (UST) — now TerraUSD Classic (USTC).

The judge reportedly considered the fact that Yoo had a residence and family ties in South Korea and was already barred from leaving the country in his decision. In addition, he questioned whether the LUNA token qualified as an “investment contract security” under Korea’s Capital Market Act. Yoo has reportedly not disputed his involvement in operating and managing one of Terra’s automated bot programs, which were at the center of the scandal.

Yoo was the first individual to have potentially faced charges after the collapse of Terra in May. Prosecutors have the option of reapplying for an arrest warrant.

In September, a South Korean court issued an arrest warrant for Terra co-founder Do Kwon, followed by Interpol adding his name to its Red Notice list. At the time of publication, Kwon’s whereabouts were unknown. Reports have suggested the Terra co-founder may have left Singapore, but South Korea’s Ministry of Foreign Affairs ordered him to surrender his passport by Oct. 20 or risk having the international travel document voided.

Related: Terra could leave a similar regulatory legacy to that of Facebook’s Libra

The case against Kwon and Terra has had many legal implications for businesses in the crypto space. In September, the deputy minister of Indonesia’s Ministry of Trade proposed requiring two-thirds of the directors and commissioners at crypto firms to be citizens, reportedly to prevent them “from fleeing the country if any problem arises.”

Norway’s government proposes eliminating reduced electricity tax for Bitcoin miners

“We are in a completely different situation in the power market now than when the reduced rate for data centers was introduced in 2016,” said Norway’s finance minister.

Trygve Slagsvold Vedum, the finance minister of Norway, has suggested the government abolish a scheme that allows crypto data centers to pay a reduced rate on electricity.

In an Oct. 6 announcement, the government of Norway proposed that data centers operating in the country be subject to the same electricity tax rates as other industries, representing a potential change in policy for Bitcoin (BTC) miners. According to the government, the reduced rate should be phased out as the demand for electricity was rising in certain areas.

“We are in a completely different situation in the power market now than when the reduced rate for data centers was introduced in 2016,” said the finance minister. “In many places, the power supply is now under pressure, which causes prices to rise. At the same time, we are seeing an increase in cryptocurrency mining in Norway. We need this power for the community.”

In May, Norway’s Parliament rejected a proposal to ban crypto mining first introduced by the country’s Red Party. Jaran Mellerud, an analyst at Arcane Research, told Cointelegraph at the time that Norway’s political parties would “likely make one more attempt at increasing the power tax specifically for miners” with an outright ban unlikely to happen.

Many BTC mining firms currently operate in Norway, using 100% renewable energy sources and contributing 0.74% of the global Bitcoin hash rate, according to data from the Cambridge Bitcoin Electricity Consumption Index. However, many residents of the Sortland municipality in the north of the country have complained about noise pollution from miners — echoing concerns from lawmakers in the United States.

Related: Crypto ownership among Norwegian women doubles, mirroring global trends

The proposed elimination of the miner electricity tax rate came following Vedum’s presentation of Norway’s national budget for 2023. According to the finance minister, subjecting miners subj to standard electricity tax rates could bring in more than $14 million in revenue.

Norway’s government proposes eliminating reduced electricity tax for Bitcoin miners

“We are in a completely different situation in the power market now than when the reduced rate for data centers was introduced in 2016,” said Norway’s finance minister.

Trygve Slagsvold Vedum, the finance minister of Norway, has suggested the government abolish a scheme that allows crypto data centers to pay a reduced rate on electricity.

In an Oct. 6 announcement, the government of Norway proposed that data centers operating in the country be subject to the same electricity tax rates as other industries, representing a potential change in policy for Bitcoin (BTC) miners. According to the government, the reduced rate should be phased out as the demand for electricity was rising in certain areas.

“We are in a completely different situation in the power market now than when the reduced rate for data centers was introduced in 2016,” said the finance minister. “In many places, the power supply is now under pressure, which causes prices to rise. At the same time, we are seeing an increase in cryptocurrency mining in Norway. We need this power for the community.”

In May, Norway’s Parliament rejected a proposal to ban crypto mining first introduced by the country’s Red Party. Jaran Mellerud, an analyst at Arcane Research, told Cointelegraph at the time that Norway’s political parties would “likely make one more attempt at increasing the power tax specifically for miners” with an outright ban unlikely to happen.

Many BTC mining firms currently operate in Norway, using 100% renewable energy sources and contributing 0.74% of the global Bitcoin hash rate, according to data from the Cambridge Bitcoin Electricity Consumption Index. However, many residents of the Sortland municipality in the north of the country have complained about noise pollution from miners — echoing concerns from lawmakers in the United States.

Related: Crypto ownership among Norwegian women doubles, mirroring global trends

The proposed elimination of the miner electricity tax rate came following Vedum’s presentation of Norway’s national budget for 2023. According to the finance minister, subjecting miners to standard electricity tax rates could bring in more than $14 million in revenue.

US lawmakers request Justice Dept share CBDC assessment

The House members claimed the “appropriate place for the discussion” on legislation concerning a digital dollar would be in the U.S. legislative branch.

Republican members of the U.S. House Financial Services Committee have requested the Department of Justice provide its assessment and legislative proposals regarding a digital dollar within 10 days.

In an Oct. 5 letter addressed to U.S. Attorney General Merrick Garland, 11 Republican lawmakers asked the Justice Department for a copy of its “assessment of whether legislative changes would be necessary to issue a CBDC,” as required by President Joe Biden’s executive order on digital assets issued in March. The House members claimed the “appropriate place for the discussion” on legislation concerning a central bank digital currency would be in the U.S. legislative branch rather than the federal executive department.

“The House Committee on Financial Services […] has spent considerable time and resources examining both the potential risks and benefits of a CBDC,” said the letter. “The Committee’s review has included analyzing whether the Federal Reserve has the authority to issue a CBDC without authorizing legislation. Committee Republicans emphasized in our CBDC principles that the Federal Reserve does not have the legal authority to issue a CBDC absent action from Congress.”

The letter included signatures from ranking member Patrick McHenry, who recently made a virtual appearance at the Converge22 conference in San Francisco, and Representative Tom Emmer, who has criticized the Treasury Department’s sanctions of crypto mixer Tornado Cash. The lawmakers requested Garland respond by Oct. 15.

Related: US lawmaker lays out case for a digital dollar

On Sept. 16, the White House released its report on a comprehensive framework for cryptocurrencies in the United States, including exploring a CBDC. The Justice Department was tasked with reporting on potential threats due to illicit uses of digital assets, suggesting changes to policies and laws.

South Carolina treasurer goes on Bitcoin ’fact-finding trip’ to El Salvador

The state official reportedly used his own funds to pay for the trip, which included discussing Bitcoin with government officials and exploring financial literacy programs.

Curtis Loftis, the treasurer for the U.S. state of South Carolina, spent five days in El Salvador as part of an “exploratory trip” focusing on cryptocurrencies.

According to an Oct. 5 announcement, Loftis was part of a delegation including South Carolina business leaders, rural health officials and individuals “interested in the expansion of cryptocurrency and blockchain technologies” who met with officials from El Salvador’s government in an effort to understand the country’s efforts to adopt Bitcoin (BTC). The cryptocurrency has been legal tender alongside the U.S. dollar in the Central American nation since El Salvador’s Bitcoin Law went into effect in September 2021.

Loftis reportedly used his own funds to pay for the trip, which included discussing Bitcoin with government officials and exploring the country’s financial literacy educational programs. According to the treasurer, the visit to El Salvador was prompted by South Carolina’s legislature exploring ways to support the adoption of crypto and blockchain in the state.

Speaking to Cointelegraph, Loftis, a self-described Luddite, said he was neither a “proponent nor opponent” of crypto but wanted to learn how South Carolina’s government could use the technology effectively in addition to promoting financial literacy among residents. The treasurer said the group tried to use Bitcoin “maybe four times” during the El Salvador trip, as payments to street vendors and local businesses.

“We were in a nicer restaurant, and the tab was about $300 to $400 — a bunch of us — and they paid with Bitcoin,” said Loftis. “I signed up for Lightning beforehand. […] It was interesting […] people living really close to the ground using Bitcoin and some of them really enjoy it — they were really pleased to have done it.”

The South Carolina treasurer added:

”That’s our mandate: not to make a world with Bitcoin or Ethereum, or not make that world — it’s just to understand what’s going on, set up a system where we […] make sure people have good resources to understand what’s happening.”

Related: Grassroots initiatives are bringing Bitcoin education to communities across America

Reports have suggested that roughly 20% of Salvadorans use BTC through Chivo Wallets, while El Salvador’s president, Nayib Bukele, announced that the government held 2,381 BTC as of July. With the crypto market down, the value of the country’s total Bitcoin investment has dropped more than 55% since September 2021 — worth roughly $48 million at the time of publication.