How D/Bond’s KYC Solution Meets MiCA Regulatory Compliance Needs

The just concluded Web Summit in Lisbon provided the D/Bond team with the opportunity to meet and share experiences with several projects including decentralised finance (DeFi) protocols. Like a sore thumb, one thing that stuck is the obvious realisation that most people we engaged with are aware of the new markets in crypto-assets (MiCA) regulations but are a little bit lost.

They know that MiCA is a regulatory framework that seeks — -for the first time — to protect the crypto sector within the EU. This includes protecting investors, issuers, and crypto-asset service providers (CASPs) while preserving financial stability, innovation, and fostering attractiveness.

A CASP is defined under MiCA as “any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis.” The EU legislation wants to protect consumers against some risks associated with crypto investments while forcing CASPs to respect related requirements. But they are unclear as to why these measures are necessary, and what such portends for the DeFi space.

Major among them is that the faces behind most CASP platforms are not known up to the point of their service reach. As a result, they operate outside regulatory regimes. This gives these CASPs some measure of unchecks as, despite the obscurity, they offer crypto services to millions across the world including in Europe where the European Central Bank (ECB) estimates that about 10% of households are investing.

The perceived risks and the rising investor demand for crypto-assets in Europe — individuals and institutional investors (56% of which reportedly stated in a survey that they have exposure to digital assets — up from 45% in 2020 — and plan to continue the trend) — could not be overlooked. It made the ECB harp on the use of leverage and lending activity, and how it could spur crypto assets to pose risks to the EU bloc’s financial stability.

The top bank touched on the need to “close regulatory and data gaps in the crypto-asset ecosystem” urging that the MiCA regulation — as a coherent regulatory and supervisory regime for EU countries — be approved “as a matter of urgency” and applied sooner as a first step.

MiCA and KYC as a component of AML

Among other things, MiCA requires CASPs to introduce general anti-money laundering (AML) safeguards and have a substantive presence and management within the EU to achieve these objectives. CASPs would be open to strict due diligence, especially those whose market volumes exceed “significant” thresholds. They will be forced to conform to existing local laws to be able to enforce regulatory compliance.

This necessity makes the know-your-customer (KYC) process, which is a critical component in the entire AML process, somewhat mandatory. KYC helps to identify and screen a user, as well as spot associated risks. KYC checks seek to help confirm that customers are actually who they say they are. As simple as that may seem, it has been quite a complicated issue in the evolving DeFi world where decentralisation is at the core of all applications.

The contention surrounds whether there is a need for KYC in DeFi considering that the need to distribute power away from a central authority is at the heart of DeFi projects’ operations. It helps them project free control, free from being governed, or sued, as the case may be. They have enabled users to trade, lend, borrow, stake, and farm assets freely with no KYC and other personal information required to engage in financial transactions over the past years. While there may be a case for the argument, the fact remains that over $12 billion has been lost to DeFi fraud due to the non-implementation of the KYC process. Whereas, it is becoming more obvious that KYC implementation does not necessarily have to be carried out by a centralised entity.

Where D/Bond meets MiCA’s expectations

Our offering aligns with what the Principal Economist at the European Commission, Dr. Joachim Schwerin, suggests in a recent interview particularly as he sees a token economy emerging with time. The economy will enable supply and demand to interact directly on secure and interlinked platforms with all data remaining the property of the data subject, in line with fundamental rights as defined, protected, and enforced in Europe.

Schwerin expects the envisaged token economy to come with a disintermediated ecosystem for all small and medium-sized enterprises (SMEs) of all sizes and sectors so that they can interact seamlessly with trading partners, customers, and investors in a secure digital environment. This would mean “the emergence of trustworthy intermediaries that add real value, without all the gatekeepers that prove so costly in terms of finance and data drain without providing real benefits,” he said.

It will also see both security token offerings (STOs) and other types of crowd-based finance forming part of the same spectrum of alternative finance that will ultimately be tokenised and become the standard for SMEs’ access to (digital) finance, in the long run, Schwerin added.

This submission added to strengthening our resolve in a way that we will see our solutions play a crucial role in the future development of the blockchain and crypto space — especially in the areas of fundraising and data protection.

D/Bond’s KYC solution in an emerging token economy

When we presented our pitch decks to the audience at the Lisbon gathering, some liked the KYC solution while others thought it violated the basic concept of Web3 (here is a brief info about the D/Bond D/ID). But we begged to differ, as we pushed for as many people to know and understand what our innovative platform is set out to achieve.

Our ecosystem shows that D/Bond meets the expectation to programme and provide a guarantee for crowdfunding as hinted by Schwerin and grounded in MiCA rules. Our platform’s element that runs like a decentralised-like fund management firm, D/capital, handles the issuing of bonds to raise capital for projects to meet specific investment goals for investors. Among others, it also helps generate income through money borrowed from investors in the form of bonds to fund startups. The pledged assets of verified bond issuers are used, among other things, to build up the liquidity pool for other DeFi projects, invest in their seed phases, etc.

Considering the regulatory issues surrounding fundraising, our KYC solution enables users to decide who can own their bonds and how much information could be revealed about them. It achieves the KYC purpose while avoiding the contention with DeFi projects being controlled like centralised entities. It is unlike existing ID verification processes which go through repetitive steps that expose unprotected personal data, cost more to execute, and are centralised hence susceptible to human negligence and error.

With two problems facing fundraising in the private sector: distorted incentives that channel resources into less productive uses, and the lack of platforms that bring supply and demand directly together without unproductive intermediaries, Schwerin believes blockchain addresses the latter and is the solution to the former. He expects the transactions of tokens — i.e. bundles of digital rights and obligations — to be based on smart contracts in combination with digital (micro-)payment systems, governed by civil law and effectively enforceable to empower the local crowd, both as customers and micro-investors.

The D/Bond platform is all-encompassing to accommodate the needs of an emerging regulated token economy. Keep up with us!

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