KYC Regulations for Cryptocurrency You Should Know About: A Guide

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So you’re eager to get involved with cryptocurrency?

If so, you want to know about the KYC regulations regarding owning cryptocurrency.

As crypto enters the mainstream, many governments around the world want to track crypto ownership.

If you want to use cryptocurrency, you want to make sure you understand these KYC requirements. This will help you stay compliant with local laws as you invest in crypto.

Here’s what you need to know:

How Do You Hold Your Crypto?

Your first step before you start accumulating crypto is to decide how you wish to hold your crypto.

You have 3 main options to do this. These are web exchanges, hardware wallets, and paper wallets.

Let’s look at the pros and cons of each wallet before we get into the KYC requirements of holding crypto.

Web Exchange

This is the easiest platform for buying, selling, and trading crypto. You can buy crypto using a bank transfer, credit card, or using other cryptocurrencies.

However, web exchanges are often the primary target for hackers. It’s also important to note that with a web exchange, you don’t hold your crypto. Rather, it’s stored for you by the web exchange. This works in the same manner as an online bank would work.

Web exchanges are also often the most compliant with local laws. Web exchanges might report your information and crypto holdings to your country’s tax authorities.

Hardware Wallet

This is a hardware device that lets you store your crypto offline. It’s also considered to be more secure than web exchanges though hacking is still possible.

You’ll be responsible for your crypto’s security with this option. You have to keep track of your wallet’s Public Key and Private Key. If you lose this information, you’ll lose access to your crypto forever.

The company that provides you with your hardware wallet can’t help you recover your crypto. So while this puts more pressure on you, it’s one of the best ways to protect your crypto and maintain your financial privacy.

Paper Wallet

This is currently the least popular option for storing crypto but might be one of the best options available!

For example, if you look for the best Bitcoin ATM near you can buy Bitcoin using cash. This anonymizes the purchase of your cryptocurrency.*

When you buy the cryptocurrency, the ATM will dispense a receipt that has your paper wallet’s details on it. As long as you keep this information secure, no one can hack into your crypto wallet.

This is currently the most secure way to hold your crypto and maintain your financial privacy.

Now let’s look into the KYC requirements that have arisen as the popularity of crypto has increased.

*Putting aside any CCTV cameras that might be on the premises.

Europe and the European Union

All financial institutions under the duress of EU law have to follow stringent KYC requirements to report their customer’s information and their transactions.

These laws are intended to combat illegal monetary activities such as money laundering. A corporation that fails to comply with such regulation can face massive fines or closure by the government. An individual can face fines or even imprisonment.

As such, holding crypto within the EU requires disclosure of your crypto assets. If anonymity is your main concern, holding crypto within the EU isn’t the best option.

However, there are a few jurisdictions within the EU that have favorable policies toward crypto investments. At present, Portugal doesn’t tax trades or sales on crypto.

It’s unclear at the moment on which direction the EU will take regarding crypto ownership. The EU has been notorious for stifling economic growth so one might expect more regulations and KYC requirements around crypto.

Nevertheless, there are EU member states, such as Portugal, with more favorable attitudes toward cryptocurrency ownership. One should also look at European countries outside of the EU. For example, Switzerland is competing with the likes of Singapore to attract crypto investors.

North America

At present, both the United States and Canada allow crypto to be used freely. However, both countries require financial institutions to report their customer’s data and transactions.

For example, web exchanges have to report their customer’s information to the relevant tax authorities. Citizens and residents of Canada and the United States are required to report their cryptocurrency on their tax returns.

There was a recent proposal in the United States where the Treasury Department wanted to require all web exchanges to report their customers who hold over $3K in crypto assets. At present, this proposal has been halted by the Biden Administration.

Overall, North America is welcoming crypto investment. Cities such as Miami, have made strides to become friendly toward crypto. However, anonymity and financial privacy are rapidly eroding in this region of the world.

Asia

The world’s largest continent is still a mixed bag when it comes to crypto KYC requirements.

China has actively tried to ban cryptocurrency ownership and cryptocurrency mining. India previously banned cryptocurrency use before decriminalizing it. At present, there are simultaneous calls for banning crypto again as well as calls to increase crypto adoption in the country.

However, some of the friendliest countries for crypto investors are also in Asia. As mentioned before, Singapore is one of the best places for owning crypto and one that respects financial privacy.

South Korea and Thailand haven’t made calls to ban crypto use. However, they have required strict KYC requirements for any citizen who wishes to own crypto. As of now, these countries aren’t favorable for foreign residents who wish to own crypto.

As Asia is becoming the epicenter of the global economy, more Asian countries will likely adopt crypto usage rather than ban it. The main question remains on how stringent will KYC requirements be.

As of now, there isn’t much information available regarding KYC requirements for South America, Oceania, and Africa.

So now we should look at the future of KYC requirements for the crypto industry. We’ll also look at how you can protect your crypto from hackers and stringent regulations.

What Do KYC Regulations Mean for the Crypto Industry?

One of the biggest reasons why the popularity of cryptocurrencies has risen is because of financial privacy.

This financial privacy, however, has caught the ire of governments and law enforcement agencies. There’s a concern among such institutions that crypto will get used for illegal monetary activities.

As such, KYC requirements for cryptocurrencies have increased all over the world. While these KYC requirements might be great for curbing financial crimes, there’s also concern about the infringement of financial privacy.

There’s also concern that regulations and increased KYC requirements might lead to government overreach to stifle economic growth.

For example, one might feel comfortable with the KYC requirements surrounding cryptocurrency in the “developed” world.

But would you feel comfortable about stringent KYC requirements surrounding cryptocurrency in Venezuela, Cuba, or Palestine?

Even in the First World, there are rising concerns over the infringement of financial privacy, with crypto being the latest victim of potential government overreach.

One must always follow the law of the jurisdiction that they live in. If you store your crypto on a web exchange, make sure they follow the laws of your jurisdiction. Never use a service that tries to violate the laws.

Nevertheless, if you want to become a serious crypto investor you might want to look for jurisdictions with favorable crypto regulations and stronger financial privacy.

Some jurisdictions will likely have strict KYC regulations that will erode your financial privacy when dealing with crypto.

Others will have less strict KYC requirements that require crypto owners to only divulge basic personal data to remain compliant. A few jurisdictions will not have any KYC regulations regarding crypto usage.

Protect Your Crypto

As mentioned in the previous section, you must always follow the KYC regulations in your jurisdiction. You should never use a service that is non-compliant with your country’s laws regarding cryptocurrency.

However, just as one protects their cash assets and precious metals it’s also crucial to protect your crypto.

For example, one should consider storing crypto in vaults. This is the same process as storing cash or precious metals.

The advantage of web exchanges is that they offer convenience. But hardware wallets and paper wallets are the best options for security and financial privacy.

You have the added responsibility of keeping track of your wallet’s information. However, this responsibility ensures that you have greater security for your crypto. Make sure you never reveal your private key or recovery phrase to anyone else.

You should also invest in home storage solutions to keep your crypto wallet in. Find a high-security safe that you can keep in your home. Make sure you store this safe in a location that the average burglar wouldn’t be able to easily find!

You can also consider owning several crypto wallets. Every few months you can transfer your crypto from one wallet to another. You can also consider distributing your crypto assets among several wallets.

Best Practices

Now let’s look at the best practices for remaining compliant with your country’s KYC regulations.

The first is to research the KYC regulations before you buy crypto. You want to make sure you understand the laws before you accumulate crypto or engage in any crypto transactions.

If you make even the slightest mistake, this can get considered a violation of the law. This can lead to harsh penalties so make sure you understand the rules beforehand.

Buying and Receiving Cryptocurrency

When you buy cryptocurrency you want to make sure you buy it from a compliant exchange. If you don’t then you can expect to raise red flags from your local financial regulators.

You want to research the popular crypto exchanges in your area. Make sure they’ve got statements showing that they comply with KYC regulations and other laws.

The other common way to receive cryptocurrency is to have a friend send you crypto from their private wallet. If they send you crypto from a hardware wallet or paper wallet, this is less likely to get tracked by regulators.

As such, you should keep a written record of this transaction. Your tax authorities might want you to report such a transaction to them.

In some jurisdictions, such transactions might be flagged because they are under the radar. If that’s the case, then avoid receiving crypto from friends or family outside of a web exchange.

Spending and Selling Cryptocurrency

Now, what about remaining compliant when you want to spend or sell your cryptocurrency? This is the area that’ll raise the red flags from financial authorities.

It’s because of the concern of illegal purchases that such KYC regulations got put into place. You want to first avoid online marketplaces that aren’t considered legitimate.

For example, cryptocurrency transactions attracted controversy when they got used for buying drugs on The Silk Road website. This website was shut down by the FBI and the founder was imprisoned.

While there are challenges to the ethics of shutting down the website and imprisoning the owner, you want to follow the rules of your jurisdiction.

If your financial authorities declare an online marketplace illegal, then you must never conduct a crypto transaction on this website. If you disagree with the laws, you can relocate to a jurisdiction with KYC regulations and crypto laws that are in line with your views.

As crypto adoption is still new, you want to stick to spending crypto with major retailers first. Wait for smaller retailers to receive legal approval before shopping with them.

If you sell your cryptocurrency for other cryptocurrencies or fiat currency, always keep a written record of this. To stay compliant, you might have to report these transactions to your tax authorities.

Those Are the KYC Regulations and Compliance Guidelines

Now you know the KYC regulations and basic compliance guidelines surrounding cryptocurrency.

The KYC regulations vary based on your jurisdiction. Some places are favorable for crypto owners, while others have declared a war on cryptocurrency!

You can look at the jurisdictions that allow crypto and compare the freedoms versus restrictions on crypto usage. Decide which ones are best for your needs but make sure you always stay compliant.

You can find more detailed crypto guides on our website!