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As KYC Comes to Crypto, Mainstream Financial Services Have a Chance to Cut Exchanges Out

Top cryptocurrency exchange Coinbase told customers in Canada, Japan and Singapore sending crypto to another digital wallet or exchange to provide the name and address of the recipient.

That was Friday (March 25).

The same day, it was revealed that the European Union plans to block anonymous cryptocurrency payments of any size to any wallet and will ban any transfers at all to destinations considered tax havens, like the British Virgin Islands, Hong Kong or Turkey, with a number of other dirty money hot spots banned as well, CoinDesk reported, citing internal parliament documents.

That plan matches a now-sidelined rule the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed in the waning days of the President Donald Trump administration to require exchanges to collect know your customer (KYC) data for any transactions above $3,000 — even those to private, non-exchange wallets.

See also: Warren Resurrects Calls for KYC Data from Private Crypto Wallets

While the U.S. is behind many of those countries in establishing a formal regulatory framework for cryptocurrencies — it only began in a coordinated way on March 10, when President Joe Biden issued an executive order on the subject — it’s likely to require some version of that, whether at a $3,000 limit as FinCEN proposed or possibly even for any transaction of any amount, as the EU is reportedly planning.

Read more: Biden’s Executive Order Set to Fast-Track Crypto Policy

It seems as if the anonymity party is over for crypto, at least for people who don’t have the reasonable degree of sophistication needed to bypass major exchanges and trade on decentralized finance (DeFi) exchanges, use mixing services and privacy coins, and more generally risk breaking laws with potentially serious consequences.

See also: When Privacy Counts, Crypto Users Turn to Mixing Services

It won’t go without a fight. Coinbase made clear it was only imposing those rules where it had to, and more broadly, exchanges like Kraken and Binance have been digging in their heels on cutting off average Russian customers.

Kraken CEO Jesse Powell justified the position by saying “people’s money is an exit strategy for humans, a weapon for peace, not for war.”

Read more: Citing Libertarian Values, CEOs of Crypto Exchanges Won’t Cut Off Russian Customers

But it’s becoming clearer and clearer that crypto anonymity will go, at least on exchanges used by the growing crypto mainstream.

Who Will Win?

There are more than a few examples of crypto exchanges and digital asset services providers elbowing their way into finance’s bailiwick — the goal of crypto, expressed in the very first line of the Bitcoin Whitepaper that started it all, is to cut out financial middlemen.

Even if that goal is a bit distant from the core service of exchanges, which is investing, it’s worth noting that more and more are issuing debit cards that allow holders to spend their crypto at retail — powered by Mastercard, Visa and PayPal, to be sure, but still without a bank account.

And just last week, crypto exchange-owned Kraken Bank became the second digital asset bank to win an American Bankers Association (ABA) routing number — a sizable step toward a Federal Reserve Master Account and the access to global payment rails that come with it.

See more: With Routing Number, Crypto Exchange Kraken’s Bank Closing in On Global Payments Rails

That means this a good time for financial services firms to take a look at the growing interest in and use of crypto — particularly among millennials and newer generations, but also by other demographics like women and minorities, according to PYMNTS’ 2021 Cryptocurrency Payments Report. The report found that 46 million Americans plan to use crypto “to make payments for everything from financial services to groceries.”

Get the report: Cryptocurrency Payments Report

After all, they have those payments rails, see clear regulation on the near horizon in 2022, see their clients big and small asking for crypto, and have the money to invest in making the still often-intimidating crypto on- and off-ramps more user friendly — and available at financial services firms they already have relationships with.

“I think in 2022, you’ll see many more people — that next wave of people — getting interested in crypto both from an investment perspective and a ‘Let’s try it for a payment’ [perspective],” BitPay CEO Stephen Pair told PYMNTS’ Karen Webster in January. “There’s going to be many more places with that service — that you’ll be able to spend crypto and do it in an in-person setting.”

Read more: BitPay CEO Says Bitcoin Payments Will Boom in 2022 as Crypto Reaches an Inflection Point

Then there’s the reality that dollar-pegged stablecoins are booming and look set to grow quickly in the next few years. Instagram’s adoption of the Pax Dollar (USDP) is a big sign. The U.S. and EU are pretty clear that four to five years is the bare — but, frankly, unlikely — minimum for a digital-dollar central bank digital currency (CBDC) that can compete with stablecoins on ease of use.

See also: Why Stablecoins Are Surging

But crypto firms have the strength of all FinTechs — speed and agility — as well as comfort with the technology and finances of crypto. The question is: Will financial firms give them the time?

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