20 Apr 2023

Ensuring Compliance: Regulatory Requirements for Crypto Custodians

Crypto custodians play a crucial role in the global crypto ecosystem by securely storing digital assets for their customers. Given the sensitivity of their business, they are required to establish strong anti-fraud measures and comply with regulations that necessitate robust Know Your Customer (KYC) and Anti-Money Laundering (AML) practices. 


In this article, we delve into the responsibilities of crypto custodians, explore the regulatory landscape they operate in, and discuss how automated KYC solutions can help them meet compliance requirements.


The Vital Role of Crypto Custodians in Safeguarding Digital Assets


Crypto custodians - Guardians of Digital Assets: Crypto custodians are specialized service providers that securely store digital assets on behalf of their customers. They tend to offer both cold and hot storage solutions, depending on the customers' security needs. Additionally, they also provide secure access to digital assets through multi-factor authentication, hardware wallets, and air-gapped systems.


Protecting Against Cybersecurity Threats: Crypto custodian services are particularly important for businesses operating in the crypto space. They offer institutional-grade security solutions that meet financial regulations and compliance requirements. By entrusting their assets to crypto custodians, businesses can protect themselves against cyber threats and ensure safe access to their digital assets.


Navigating the Regulatory Landscape


Compliance is Key- Regulations and Crypto Custodianship: With increasing government oversight on cryptocurrency transactions, many businesses — including crypto custodians — need to obtain licenses to operate legally. Compliance with regulatory requirements is vital to maintain a high level of safety and security for investors — and ensure the integrity of the crypto ecosystem.


FATF Guidelines -  Upholding Global Standards: The Financial Action Task Force (FATF), an intergovernmental organization combating money laundering and terrorism financing, has established guidelines for Virtual Asset Service Providers (VASPs) regarding KYC and AML checks. These guidelines include customer due diligence measures, risk-based approaches, and customer identification protocols. Compliance with these guidelines is essential for crypto custodians operating in FATF-compliant countries.


KYC: The Gateway to Trust and Security


Know Your Customer (KYC) - Building Trust and Mitigating Risks: KYC rules and checks are essential for financial institutions and crypto custodians. KYC involves verifying customer identities, confirming personal information such as name, address, proof of identity, and source of funds. By carrying out effective KYC procedures, custodians can prevent fraud, detect suspicious activities like money laundering or terrorist financing, and build trust among their client base.


Comprehensive Due Diligence- A Foundation for Compliance: To ensure compliance with complex global financial regulations, crypto custodians must collect comprehensive due diligence data from customers. This helps ensure that clients are not involved in illegal activities and enables custodians to maintain the trust of their customers and meet regulatory requirements.


KYC and AML for Crypto Custodians


Protecting Against Financial Crimes: AML and KYC rules and regulations are crucial for the crypto custodian industry. Crypto custodians must adhere to obligations that keep their customers safe from financial threats, prevent exploitation for money laundering, and mitigate the risk of involvement in illicit activities, including terrorist financing.


The FATF and FinCEN-Regulatory Framework:  The FATF guidelines and the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN) impose specific rules for VASPs, including crypto custodians. These rules encompass customer identification requirements, ongoing monitoring of transactions, and reporting suspicious activity indicative of money laundering or terrorist financing.


Strengthening Compliance with KYC and KYB


KYC and KYB: KYC procedures are crucial for crypto custodians to meet global compliance requirements and protect themselves from financial crime. KYC helps custodians determine the identity of each customer, verify their sources of funds, and confirm that they are not associated with any illicit activities. By adhering to KYC practices, custodians ensure their services align with regulations and standards imposed by governmental and regulatory bodies.


KYC Documentation:  KYC typically involves collecting personal information such as name, address, date of birth, and government-issued identification numbers. Additionally, custodians may require additional forms of verification — such as proof of residence or source of funds — to robustly prevent money laundering, fraud, and other financial crimes. This comprehensive documentation allows custodians to have a clear understanding of a customer's financial background and provide appropriate services tailored to their needs.


Automated KYC/KYB: Adopting automated KYC systems brings numerous benefits to crypto custodians. These systems provide access to additional resources for verification and risk management measures. By leveraging automated KYC, custodians can monitor transactions more effectively, detect suspicious activity, and reduce exposure to fraudulent activities. The use of such systems improves accuracy, efficiency, and reduces reliance on manual processes — thereby streamlining compliance efforts.


Benefits of Automated KYC include:


  • Improved accuracy and efficiency of KYC processes.
  • Reduced manual effort and reliance on human compliance teams for processing information.
  • Increased security through automated identity verification.
  • Ability to quickly onboard customers remotely in diverse jurisdictions.
  • Reduced paperwork and storage costs related to customer data.
  • Instant alert notifications when suspicious activity is detected.
  • Easier compliance with global privacy regulations such as GDPR.
  • Seamless integration with existing systems for a streamlined workflow.
  • Enhanced customer experience through improved onboarding processes.
  • Automated fraud detection to mitigate the risk of financial losses due to fraudulent activity.
  • Consolidation of multiple data sources into a single view.
  • Improved transparency and traceability for auditing purposes.
  • Enhanced customer insights through predictive analytics and reporting tools.
  • Streamlined workflow across multiple business functions such as KYC, AML, onboarding, etc.
  • Greater scalability when expanding operations into new markets or regions.


KYC-Chain: Empowering Crypto Custodians


KYC-Chain offers an end-to-end onboarding solution designed to efficiently and securely onboard clients for crypto custodians, as well as other VASPs and financial institutions. Our solution adapts to the regulatory requirements of global jurisdictions, allowing custodians to quickly scale into new markets, strengthen anti-fraud safeguards — and achieve compliance in the markets they operate in. 


KYC-Chain provides a seamless and customer-centric onboarding journey, enhancing the overall experience for both custodians and their clients.


Are you a crypto custodian looking for an automated KYC solution to take your business to the next level? Get in touch and we’ll be happy to arrange a demo.

Any Questions?

Our team is always ready to help you and your business.
Get in touch

Latest Articles

We should have some subheading here, it’s good for SEO as well
Streamline Identity Verification Processes for Fintech Companies Using KYC-Chain
Efficient and reliable identity verification is essential for fintech companies to comply with regulations and build trust with their customers.…
21 Jun 2023
Demystifying CDD and EDD: When and Why Are They Essential?
Understanding the significance of Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) is crucial for businesses and organizations that…
16 Jun 2023
Safeguarding Against Crypto Identity Fraud: Exploring Risks and Effective Solutions
Introduction In today's digital landscape, the rise of cryptocurrency has revolutionized financial transactions. However, with this increased adoption comes the…
15 Jun 2023