Identity verification platform IDnow has joined several partners to help make Crypto Asset Service Providers (CASPs) and self-hosted wallets compliant with European regulations.
IDnow, alongside the the IOTA Foundation, walt.id, SPYCE.5, seeks to guide CASPs to comply with the European Anti-Money-Laundering Regulation and the Transfer of Funds Regulation (TFR).
The new TFR regulation in the EU mandates that all cryptocurrency transactions will need to carry identifying data of the sender and the receiver. According to the new rule, compliance with TFR is mandatory for all CASPs.
Additionally, the new AML Regulation will require all CASPs to comply with similar AML rules as other financial institutions.
Rayissa Armata, Director Global Regulatory and Government Affairs at IDnow, stated: “We are excited to be part of this forward-thinking consortium alongside highly esteemed crypto asset industry players to address a pressing need for crypto wallet solutions that comply with the latest EU regulations.
“Crypto companies are facing a race against the clock to implement new requirements, which is why we wish to submit this proposed solution to the EU for consideration to address the technological and regulatory challenges around AML, KYC and TFR in crypto.”
One challenge for CASPs to adhere to the new rules lies in GDPR compliance, as personal identifiable information (PII) should not be stored on blockchains or Distributed Ledger Technologies (DLT). However, to comply with the new regulations, CASPs need to know with whom they are doing business and continuously verify this information.
To address this challenge, the partners have formed a consortium to propose a system where a trusted party tokenises an identification process it has witnessed, allowing CASPs to have confidence in this process, without revealing any PII.
The resulting soul-bound token (SBT) can be used for blockchain processes, enabling Web3 native interactions, whilst trusted parties can reveal the identity information, if requested by an authorised party, such as law enforcement, as well as revoke the SBT if needed.
Dominik Schiener, Chairman of the Board of the IOTA Foundation, said: “We are thrilled to be working with such incredible partners to create a truly seamless user experience and to provide the underlying distributed ledger technology.
“Identity verification in Web3 environments should be simple and straightforward, without sacrificing privacy or security. As regulatory requirements grow, we need innovative solutions that are easy to use for both businesses and everyday users.”
Within the consortium, the IOTA Foundation will provide the underlying network as the proposed solution will be implemented on an Ethereum Virtual Machine (EVM)-compatible IOTA Smart Contract Chain. Walt.id will develop, provide, and maintain the trusted witness service for creating and verifying SBTs like identity proofs, while IDnow will deliver the identity verification solution to onboard users into the wallet solution.
Dominik Beron, Founder of walt.id., added: “We have been building decentralised identity and wallet solutions for many clients across various industries, but this project is particularly interesting as it shows new ways of onboarding and verifying users for crypto and DeFi use cases that have traditionally been struggling with regulatory compliance.”
Bloom will provide the capabilities for users to store, present and prove ownership of the SBT, whilst SPYCE.5 will supply the essential infrastructure for seamless interchain communication and transaction validation, ensuring the system’s overall efficiency and regulatory compliance.
