Katherine Ross

The US government has accused crypto exchange KuCoin and two founders of violating anti-money laundering laws.&nbsp;&nbsp;



KuCoin founders Chun Gan and Ke Tang were each charged with one count of conspiracy to violate the US Bank Secrecy Act and one count of conspiracy to operate an unlicensed money transmitting business.&nbsp;



Neither have been arrested, according to the US Department of Justice.



“As today’s indictment alleges, KuCoin and its founders deliberately sought to conceal the fact that substantial numbers of US users were trading on KuCoin’s platform,” US Attorney Damian Williams said in a <a href="https://www.justice.gov/usao-sdny/pr/prominent-global-cryptocurrency-exchange-kucoin-and-two-its-founders-criminally">statement</a>.



Read more:<a href="https://blockworks.co/news/lawmakers-harming-crypto-industry"> Former government officials say DAAMLA could harm US crypto industry</a>



By skirting <a href="https://blockworks.co/tag/aml">AML</a> policies, the DOJ alleged, <a href="https://blockworks.co/tag/kucoin">KuCoin</a> was able to transmit more than $4 billion of “suspicious and criminal funds” and received $5 billion from operating “in the shadows of the financial markets.”



The <a href="https://blockworks.co/tag/doj">DOJ</a> said that KuCoin, Gan and Tang “affirmatively attempted to conceal the existence of KuCoin’s US customers in order to make it appear as if KuCoin was exempt from US AML and <a href="https://blockworks.co/tag/kyc">KYC</a> [know-your-customer] requirements.”



US customers were allegedly “actively prevented” from identifying themselves when they opened accounts.



“Indeed, until at least July 2023, KuCoin did not require customers to provide any identifying information. It was only in July 2023, after KuCoin was notified of a federal criminal investigation into its activities, that KuCoin <a href="https://blockworks.co/news/kucoin-enforces-kyc-verification">belatedly adopted a KYC program</a> for new customers,” the DOJ said.



Last December, <a href="https://blockworks.co/news/kucoin-settles-with-nyag">KuCoin settled with the New York Attorney General</a> for $22 million and announced that it would stop operating in New York after it was accused of not properly registering with the state. $16.7 million of the payment went to refunds for New York customers.&nbsp;



The Tuesday action against KuCoin marks the first time that the DOJ has targeted a crypto exchange since it announced a <a href="https://blockworks.co/news/binance-regulators-settle-criminal-case">multi-billion dollar settlement with Binance</a> late last year.



As part of its settlement, former CEO Changpeng Zhao stepped down and is set to be sentenced next month. <a href="https://blockworks.co/news/doj-indictment-binance-changpeng-zhao">Binance was also accused of AML violations</a>.



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DOJ accuses crypto exchange KuCoin of skirting anti-money laundering laws

Bessie Liu

The ERC3643 Association recently revealed a new UI plug-in tool that will enable DeFi protocols to run checks in compliance with the ERC3643 standard.



The ERC3643 standard, also known as the T-REX (Token for Regulated Exchanges) standard, is a modification of ERC-20.&nbsp;



Unlike the ERC-20 token, ERC-3643 is a permissioned token that uses <a href="https://blockworks.co/tag/smart-contracts">smart contract </a>technology to define conditional transfer functions.&nbsp;



This means that decentralized <a href="https://blockworks.co/tag/validator">validators</a> can only approve certain transactions after they have met predetermined rules. This enables compliance structures that can be used for regulated assets, like securities, while retaining the standard of ERC-20 functionality.&nbsp;



This new UI tool was developed in collaboration with DevPro and Tokeny and enables ERC-20-compliant DeFi applications to interact with permissioned ERC-3643 tokens. This includes <a href="https://blockworks.co/tag/real-world-assets">real-world assets</a>, token securities, loyalty tokens, <a href="https://blockworks.co/tag/stablecoins">stablecoins</a> and <a href="https://blockworks.co/tag/cbdc">CBDCs</a>.&nbsp;



Read more: <a href="https://blockworks.co/news/ethereum-improvement-proposals-2024">Ethereum Improvement Proposals to watch in 2024</a>



Dennis O&#8217;Connell, president of the ERC-3643 Association, told Blockworks that compliance rules are directly embedded through ERC-3643 at a token level.



&#8220;As an extension of ERC-20, ERC-3643 ensures interoperability with any ERC-20-supporting applications. The key distinction lies in denying transactions or actions if counterparties fail to meet compliance requirements, effectively bridging compliance and interoperability,” O&#8217;Connell said.&nbsp;



He notes that, unlike other standards that use wallet whitelisting for know-your-customer (<a href="https://blockworks.co/tag/kyc">KYC</a>) checks, ERC-3643 uses digital identity to whitelist users through verifiable credentials.&nbsp;



“This ensures the compliance validation process is entirely on-chain while protecting privacy. No actual data will be published on-chain; only verifiable credentials, which are proofs of verification by trusted parties appointed by token issuers,” O&#8217;Connell said.&nbsp;



Read more: <a href="https://blockworks.co/news/ethereum-devs-plan-2024">Dencun and Pralectra: Ethereum core devs chart an ambitious 2024</a>



The standard was initially <a href="https://ethereum-magicians.org/t/eip-3643-proposition-of-the-t-rex-token-standard-for-securities/6844/4">proposed</a> to the <a href="https://blockworks.co/tag/ethereum">Ethereum</a> community in 2021, but did not receive <a href="https://www.erc3643.org/news/ethereum-community-approves-erc3643-as-the-first-tokenization-standard">approval</a> until December last year. Companies currently exploring this technology include APEX Group, Aztec Group and Capgemini, to name a few.



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ERC-3643 is looking for ways to bring compliance to RWA tokenization

Wallet infrastructure provider Safe has collaborated with digital asset bank Sygnum and cryptocurrency recovery group CoinCover, to introduce Safe{RecoveryHub} — a handful of social recovery options for crypto wallets.



Lost or forgotten private keys has left an estimated <a href="https://github.com/jconorgrogan/Lost-ETH">$1.92 billion worth of ether</a> in the lurch. When a user first signs up for a crypto wallet, they generate a public key — a string of random letters and numbers — with which they can receive crypto, and a private key, used to send or otherwise prove ownership of the tokens by cryptographically signing transactions.



Key management systems in Web3 have very few recovery solutions, meaning that if a user loses their private key, they will no longer be able to access their assets.&nbsp;



“Social recovery” has been the exception. The point is to provide a means to recover a missing private key through “recoverers” such as families, friends and collaborators.



Safe{RecoveryHub} users can provide recoverers access to their accounts only in the event that a recovery is taking place. They will also be able to set up more than one recoverer for added security, similar to how a crypto wallet operate as a 2/3 multisig, for example.



Lukas Schor, the co-founder of Safe told Blockworks that Safe{RecoveryHub} consists of two main components. The first is a Safe module that enables the execution of recovery transactions for the popular multisig solution.



The social recovery process, in this instance, is initiated when a user loses access to their Safe and depends on their previously selected recovery setup option.



“When the user utilizes their own, fully self-custodial setup, they can go through every step of the process through our interface or alternatively fully on-chain today and create the recovery transaction, replacing lost access keys with new keys that the user controls,” Schor said. “When the user chooses a third-party option, then there likely will be some authentication or identification process before the third party will initiate the recovery on behalf of the user.”



Once the recovery transaction is created, the user will have an option to veto the transaction. If they do not do so, then the recovery transaction will be executed and they will be able to generate new owner keys, which will allow them to access their smart accounts again.



Schor notes that the <a href="https://github.com/gnosis/zodiac-modifier-delay/tree/main">timelock module</a> used for social recovery has been built by the Gnosis Guild, and has been used and in production for multiple years now.&nbsp;



“Only the user, individual or organization, can activate [or] deactivate the module and set the parameters. Only the Safe account can cancel any recovery attempt. Only the set recoverer can initiate a recovery transaction,” Schor said.



Martin Koeppelmann, co-founder of Gnosis, told Blockworks that technology must account for human error, as simple mistakes can have catastrophic consequences.&nbsp;



Safe’s “framework for recovery options is an important step towards further adoption,” Koeppelmann said. “What is equally important is that it’s done in a way so that users don’t have to make compromises about still being in full control of their funds.”



<h2 class="wp-block-heading">Previous attempts at social recovery</h2>



Safe’s is not the first company that has attempted social recovery. Hardware wallet firm Ledger similarly <a href="https://blockworks.co/news/ledger-delays-recover-service">attempted to introduce social recovery</a> earlier this year.&nbsp;



Ledger users had the option to provide KYC information to custodians, and their private keys would be split into three different parts, stored separately on what they said are “cryptographically secure” Hardware Security Modules.



In the case of Safe, a user could choose to trust a custodian or a third party to store their keys, but they also offer the users the choice to store their keys with family members or friends.


<div class="wp-block-image">
<figure class="aligncenter"><img decoding="async" src="https://lh7-us.googleusercontent.com/Kwss-pdcLfr5pM0iBoo_Q-xfXNWQSMPR3gqwe-u1WsfoHIhjzH1WiNveu8CJtO4lX8JTjT2NLpKzemzWVc_7HEv4xs6O3c4NnXLOqi6wtgPCZH65H1fXOTdAlV3SiZn7XjfdFEwrzYFb-_C8pX2XhDI" alt=""/><figcaption class="wp-element-caption">Source: Safe</figcaption></figure></div>


Schor notes that there is no single way to solve the issue of recovery in the Web3 space, and the Safe{RecoveryHub} is just one viable solution.&nbsp;



He adds that there are larger issues around of recovery schemes, such as limitations around privacy, accessibility and availability — particularly for new users.&nbsp;



“From highly heterogeneous use cases like investing, social networking, and gaming to a highly diverse set of users ranging from everyday individuals and professionals to organizations, recovery needs to be able to cater all these different needs,” he said.&nbsp;



This sentiment is shared by Hannes Graah, the founder and builder of the Zeal wallet, who notes that self-custodial arrangements should be easier to use than a normal bank in order to achieve mainstream adoption of cryptocurrencies.



“It’s promising to see Safe’s social recovery initiative consider a wide range of trust models from trusted parties like family and friends to backup devices and not simply assume that everyone has a close circle they can rely on,” Graah said.



<h2 class="wp-block-heading">Advances around account abstraction</h2>



Social recovery is focused on key management and it should not be confused with the wider work that is being done around ERC-4337, or <a href="https://blockworks.co/tag/account-abstraction">account abstraction</a>.



The purpose of ERC-4337 is to enable a more secure and user-friendly method for managing Ethereum accounts. The model allows users to execute transactions, including smart contract interactions, directly from their wallet. This enhances security and simplifies the process, making Ethereum more accessible and safer to use.



Read More: <a href="https://blockworks.co/news/ethereum-erc4337-account-abstraction-smart-contract">Ethereum’s ERC-4337 Account Abstraction Smart Contract is Live</a>



ERC-4337 is more of a stepping stone that can enable tools such as socially recoverable multisigs.



For example, if a wallet holder dies (and therefore their account has been inactive for a set period of time), account abstraction could enable funds to be transferred to a beneficiary automatically.



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Safe social recovery eases private key management

Macauley Peterson

Using blockchain in finance to establish more efficient markets is one of the technology&#8217;s most logical applications. Whether you call it decentralized finance, open finance, or simply crypto, there are benefits to its enhanced transparency, automated accounting and reduced counterparty risk.



The trillion-dollar question is, where are the apps to onboard the masses?



Heron Finance, an US Securities and Exchange Commission-registered investment advisor (RIA), is swooping in to provide investors with a robo-advisor for private credit markets via the Goldfinch protocol, both of which are developed by Warbler Labs.



It’s a bid to democratize access to an asset class previously reserved for high net-worth individuals able to foot the high minimum investment amounts.



Heron’s approach is aimed at individual investors of all sizes. While Heron has not yet launched, Goldfinch, an open-source lending system, has facilitated over $110 million in loans across more than 20 countries in its three-year history.



Read more: <a href="https://blockworks.co/news/undercollateralized-lending-wildcat">Is ‘hands-off’ undercollateralized lending possible? Wildcat thinks so</a>



Warbler Labs co-founders Mike Sall and Blake West have previously proffered the “crazy” idea that all private debt will move to crypto rails.



“Eventually, for people running companies, it will seem silly to get a loan from a private bank rather than a crypto protocol,” Sall <a href="https://gov.goldfinch.finance/t/gip-06-proposed-goldfinch-roadmap/825">wrote</a> in 2022. “Going to a bank will be like bartering your goods with your neighbors instead of using the internet to sell them online.”



The recent &#8220;Blueprint for Goldfinch&#8221; proposal, known as <a href="https://gov.goldfinch.finance/t/grc-02-a-blueprint-for-goldfinch/1881">GRC-02</a>, outlines a strategic plan to transform Goldfinch into an extensive ecosystem for on-chain lending businesses. This strategy aims to capitalize on the $1.4 trillion private credit market with a crypto edge, to make the market more open, interoperable and liquid.



Heron Finance is a reflection of that blueprint. Its clients will select an investment strategy that aligns with their risk tolerance and objectives. The platform then constructs a diversified portfolio of private credit deals, ensures ongoing rebalancing, and pays out a steady monthly yield — projected to fall in the range of 11-16% annually.



Read more: <a href="https://blockworks.co/news/cryptocurrency-investment-bull-market">Investor rush into crypto products the largest since 2021 bull market high</a>



The team behind Heron created the first non-fungible token (<a href="https://blockworks.co/tag/%20nfts">NFT</a>) for compliance with know-your-customer (<a href="https://blockworks.co/tag/kyc">KYC</a>) requirements in 2021, Sall said in a statement. This has culminated in Heron becoming the first SEC-registered robo-advisor primarily focused on private credit.



West pointed to the company&#8217;s commitment to transparency and cost-effectiveness.



&#8220;We built Heron Finance on the open-source, blockchain-based Goldfinch protocol because we believe investors deserve better transparency and costs compared to traditional finance,&#8221; he said.



The launch comes alongside an anticipated boom in the private credit sector, driven by macroeconomic and regulatory tailwinds, Sall said, citing Morgan Stanley <a href="https://www.morganstanley.com/ideas/private-credit-outlook-considerations">analysis</a> projecting the private credit market will grow from $1.4 trillion in 2023 to $2.3 trillion over the next four years.



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Warbler Labs dogfooding its Goldfinch protocol with Heron Finance

Casey Wagner

Coinbase launched its Verifications platform Thursday, bringing know-your-customer policies on-chain.&nbsp;



The exchange said launching identity verification on the chain protocol level increases security and transparency, providing a solution to common challenges associated with typical KYC methods.&nbsp;



“Built on the [Ethereum Attestation Service’s] open standard, our verifications are public and composable,” Coinbase Cloud, the company’s blockchain infrastructure arm, <a href="https://x.com/CoinbaseCloud/status/1722702333576905115?s=20">wrote</a> on X.&nbsp;



Ethereum Attestation Service is a base layer where users can make declarations and add virtual signatures to information.&nbsp;



“EAS enables anyone to make attestations on chain or off chain about anything,” the service’s website reads. “You simply register a schema (or use an existing one) about any topic and make attestations referencing that schema.”



Coinbase Verifications, built on Coinbase’s layer-2 <a href="https://blockworks.co/tag/base">Base</a>, already has about 9,300 attestations from users, according to <a href="https://dune.com/ryanyyi/verifications-by-coinbase">data</a> from analytics firm Dune. The service is expected to help particularly with Sybil attacks, which is when hackers use a single node to create many fake identities.&nbsp;



The service is the next step toward “using open source, public good infrastructure to enable the next billion users to come on-chain,” said Jesse Pollak, the creator of Base.



The move marks Coinbase’s <a href="https://blockworks.co/news/coinbase-base-success-rea">entry into the decentralized identity game</a>. Proof of Humanity, a verification protocol where users can submit social and video proof of their identities, emerged as a leader in the space when it launched on Ethereum-built application Kleros in 2021.&nbsp;



Read more from our opinion section: <a href="https://blockworks.co/news/daos-mediation-code-governance">Made by humans but governed by code?</a>



“In our digital interactions, we cannot know who is sitting on the other side of the screen,” the Kleros team said at time of launch. This enables AI manipulation through impersonation and the spread of misinformation by bad actors.



Coinbase’s announcement comes as Coinbase shares begin to par gains after an explosive week. The stock was trading down a little less than 1% Friday <a href="https://blockworks.co/news/crypto-equities-soar-market-rally">after gaining as much as 6% during Thursday’s trading session</a>.&nbsp;



Still, Coinbase (<a href="https://blockworks.co/price/coin">COIN</a>) remains up close to 7% over the past five trading days and is in the green more than 175% since the start of the year.&nbsp;



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Coinbase launches KYC service on Base

Tokenized real world assets such as homes and private credit are a trending topic in the blockchain technology space, seemingly poised to become the next major narrative.&nbsp;



Earlier this month, a handful of companies in the industry banded together to form the Tokenized Asset Coalition (TAC), including Aave, Circle and Coinbase. Beyond creating educational content and building the necessary infrastructure to bring different types of assets on-chain, the coalition is also looking at developing relevant, compliant principles to drive the adoption of blockchain technology.&nbsp;



Blockworks sat down with Centrifuge founder Lucas Vogelsang at Permissionless II to learn about some of the necessary standards and regulatory hurdles such as know-you-customer (KYC) laws that need to be developed in order to bring <a href="https://blockworks.co/news/real-world-assets-empire-buzzwords-defi">tokenized assets onto the blockchain</a>.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Blockworks: Could you tell me a little bit about how the tokenized asset coalition came to be and what it is trying to achieve?



Vogelsang: In 2018, there was this telegram group called “DeFi,” just decentralized finance, and it was really just a group of people looking at how to build financial products on-chain. At that time we barely had any crypto infrastructure, but the idea was that if you could create a token, and that token could be used in your DeFi protocol, and it becomes composable then you are building this new financial system.&nbsp;



Those people coming together and working on it just sped up the industry so much. One of the things that came out of that was DeFi Summits, for example. I saw firsthand how much the financial system is an ecosystem of many different participants and how you make it so much faster if you improve collaboration.&nbsp;



With TAC, what we’re trying to build is a marketplace or a whole ecosystem. The better we can standardize and work together, the faster the whole industry will reach an escape velocity and actually be able to compete.&nbsp;



Blockworks: What are some standards the TAC is looking into?&nbsp;



Vogelsang: I think <a href="https://blockworks.co/tag/kyc">KYC</a> will be one of the standardizations that will come sooner or later. KYC credentials today aren&#8217;t really portable, and real-world asset DeFi will have to be KYC’ed and we will have to figure out how we actually work together on this.&nbsp;



Another one that I’m personally very interested in, and not really an active TAC project, is the 4626 tokenized vaults standard. If you think about most of these real-world asset pools, the problem is that many of them are incompatible with 4626 because 4626 is atomic. So, if you want to redeem shares, in the same transaction, you immediately get the underlying collateral or pool asset back, but this is not the case for RWAs. So we’re figuring out a way to see if we can come up with an extension that is more compatible with RWA projects so that if you want to provide liquidity or invest in any of these kinds of things, you can do so.



Blockworks: What is the value of having RWAs on-chain?



Vogelsang: The biggest value prop of <a href="https://blockworks.co/tag/real-world-assets">RWAs</a>, well I think there are two. There’s making the creation of these assets more efficient because you have instant settlement, a single source of truth on-chain that different service providers can use and you don’t have to send spreadsheets back and forth.&nbsp;



The other thing that is part of this whole RWA narrative for me is creating better market infrastructure. So once you have these assets on-chain, you can trade it more efficiently, you can borrow against it in an automated way. But you have to have to start with the <a href="https://blockworks.co/tag/tokenization">tokenization</a> part because, without these assets, there’s nothing to do.&nbsp;



Where this journey is going now, and this is where it gets exciting, is when you have 10x improvement over [traditional finance]. Ultimately, people don’t care about having these assets as a token if it doesn’t give them a better experience. If you just save a little bit of fees per year because the tokenization process is a bit cheaper than the [traditional finance] securitization process, sure that’s cool, but it’s not nearly as cool as if you can take an asset today that is illiquid, and you buy a tokenized version of it that’s liquid, because the market infrastructure is actually better on-chain and more efficient.&nbsp;



Blockworks: Could you tell me a little more about these illiquid assets in the real world that you think can be liquid on-chain? Would it be something like properties or houses?



Vogelsang: There are a lot of people in the crypto native world experimenting with marketplaces for non-fungibles, effectively, making a house liquid requires the same thing — we need to figure out a way for a liquid market to exist for non-fungible assets, real-world assets, but I think that is going to come later because it’s still a pretty hard problem.&nbsp;



If you look at fungible assets, such as private credit, the reason why it’s called private credit is because it’s not publicly traded. It is not an open public market because those assets are too hard to make liquid on the New York Stock Exchange.&nbsp;



If we can build a more efficient market infrastructure for these assets, we can turn them from private credit assets to public credit assets. All of these assets have a huge illiquidity premium right now because they are more expensive to finance. So when you can take these assets that are too small or too complicated to make liquid, and you move it to the right on the spectrum, that’s when you will start building something really powerful because now all these assets become liquid.



That’s why when I think of standardization efforts, focusing on creating the infrastructure needed for that to happen is really the biggest unlock for real-world assets.



This interview has been edited for brevity and clarity.



Updated Oct. 5, 2023 at 11:55 am ET: Clarified for additional context.



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Standardization coming for real-world assets ‘sooner or later’: Q&A with Centrifuge CEO

Shalini Nagarajan

Coinbase has notified a segment of its Indian user base about a possible service suspension, leading to worries that the exchange may shut down operations in India.



However, the company emphasized that this warning was specifically sent to Indian users residing abroad who no longer align with the exchange&#8217;s criteria.



According to Coinbase&#8217;s official site, its services are not currently offered in India.



“It is possible that during the course of a recent routine review of our systems, some accounts may have been identified that no longer meet our updated standards,” a Coinbase spokesperson told Blockworks on Monday, declining to comment on what the new standards are.



“We will therefore be disabling these accounts, and allow customers to update their information at a later date.”



After The Economic Times, an Indian media outlet <a href="https://economictimes.indiatimes.com/tech/technology/coinbase-is-stopping-all-services-for-indian-users/articleshow/103558801.cms">reported</a> on Sept. 11 that Coinbase would end its services for registered users in India — a claim that was mostly inaccurate — the company clarified the situation.



A spokesperson from Coinbase added that impacted users either withdraw their balances or move them to different crypto platforms until Sept. 25.



Coinbase requires users to meet certain compliance standards, mainly based on know-your-customer (<a href="https://blockworks.co/tag/kyc">KYC</a>) and anti-money laundering (<a href="https://blockworks.co/tag/aml">AML</a>) laws, which include ID verification and sometimes proof of residence. The exchange may also have undisclosed internal criteria.



A source familiar with the matter told Blockworks that <a href="https://blockworks.co/tag/coinbase">Coinbase</a> is not halting services in India. They clarified that the exchange&#8217;s email was specifically directed at Indian users accessing the platform from outside the country.



Earlier this year, India&#8217;s finance ministry <a href="https://blockworks.co/news/india-crypto-kyc-aml">declared</a> that AML measures are now applicable to cryptocurrency companies, mandating their compliance with the broader financial sector.&nbsp;



Crypto companies in India are now obligated to provide KYC information upon request by authorities.&nbsp;



Additionally, crypto businesses are legally obligated to report any suspicious transactions to India&#8217;s Financial Intelligence Unit, ensuring greater accountability to the government.



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Coinbase deactivates select Indian accounts over standard requirements

Sebastian Sinclair

Several exchanges popular throughout Asia have updated their terms of service, tightening know-your-customer (KYC) protocols ahead of upcoming regulatory changes across the region.



Seychelles-based Bitget said Sunday it was updating its KYC measures in a bid to comply with requirements, including the city-state’s recently updated guidelines for banks.



Directives from the Monetary Authority of Singapore (MAS) — both a central bank and regulator — are advising financial institutions to put in place appropriate <a href="https://blockworks.co/news/on-chain-monitoring-risk-management">risk management procedures</a>.&nbsp;



It comes as MAS shut down Digital Payment Token (DPT) service providers from “facilitating lending and staking of DPT tokens by their retail customers,” <a href="https://blockworks.co/news/singapore-thailand-ban-crypto-staking">Blockworks previously reported</a>.



As such, Bitget, alongside KuCoin and OKX — considered to be some of the more popular platforms for Asia-based crypto traders, including Singapore — is advising users to update their KYC verification ahead of next month.



“Starting from Oct. 1, users who have not completed level 1 KYC verification will only be able to withdraw, cancel orders, redeem subscriptions and close positions, being restricted from creating new trading orders,” the exchange said.



KuCoin and OKX, both headquartered in Seychelles following China’s crackdown on digital assets in 2017, have also recently updated their KYC policies. Bitget currently ranks 16th among exchanges ranked by trading volume over a 24-hour period, Coingecko data <a href="https://www.coingecko.com/en/exchanges">shows</a>. OKX and KuCoin rank 7th and 22nd respectively.



While KuCoin had implemented KYC on its platform back in 2018, the exchange said it has strengthened its identity verification procedures — with users needing to upload documents and complete face checks. The changes are expected to take effect at the <a href="https://www.kucoin.com/support/360015102254">end of this month</a>.



OKX, which also updated its terms last week, said users would need to submit a selfie using a government-issued ID — to be stored by the exchange — in order to use all its services.



While Singapore represents the clearest jurisdiction digital asset service providers are shifting focus towards, it isn’t the only one.&nbsp;



Earlier this year, Japan <a href="https://blockworks.co/news/japan-crypto-anti-money-laundering-rules">sought to tighten anti-money laundering measures</a> designed to better track crypto transactions, answering calls from other countries.



Also, starting next year, South Korea&#8217;s <a href="https://blockworks.co/news/financial-statements-must-include-crypto-south-korea-regulator">Financial Services Commission</a> will require companies to include details about their crypto holdings, anticipated value, and related business models in their financial statements to align crypto accounting with conventional financial reporting.



All measures point towards a tightening regulatory environment across the region, with crypto service providers adhering to, or seemingly positioning for, changes long-overlooked by financial officials.



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Regulatory landscape across Asia prompts exchanges to enhance KYC measures

Darren Kleine

Liquid staking in crypto is a novel concept that is difficult to compare to anything in traditional finance. But one way to get the gist is to think of it like a bank.&nbsp;



The customer deposits funds into the bank, which then takes the collective deposits of all customers to manage risk and accrue revenues, paying back customers a small percentage in interest.



When someone purchases staked <a href="https://blockworks.co/price/eth">ether</a> (<a href="https://blockworks.co/tag/steth">stETH</a>) on a platform like Lido, they’re not staking their deposit themselves. Like a bank, the platform manages the assets on the depositor’s behalf, passing a small portion of profits back to the depositor.



Unfortunately, this analogy quickly breaks down, Steakhouse Financial DAO Consulting contributor ADCV explains on the Bell Curve podcast (<a href="https://open.spotify.com/episode/7aHaK3ZccDJQo8hfsr6Bk9?si=lnTPHnvaQaW3UaN3C2_QMw">Spotify</a>/<a href="https://podcasts.apple.com/us/podcast/the-business-model-of-lsts-banks-bribes-and/id1641356619?i=1000623042742">Apple</a>).



“These [platforms] are not actually custodial, so they don&#8217;t fulfill many of the conditions that would actually make them banks. They&#8217;re just smart contracts that coordinate incentives between players in a decentralized and permissionless way.”



“<a href="https://blockworks.co/tag/ethereum">Ethereum</a> itself is unlike anything that&#8217;s ever been done before,” ADCV says. “It doesn&#8217;t really match closely to analogs from the past or from [traditional finance]. Neither does <a href="https://blockworks.co/tag/staking">staking</a> and also therefore, neither does <a href="https://blockworks.co/tag/liquid-staking">liquid staking</a>.”



<h2 class="wp-block-heading">Staking concierge?</h2>



One <a href="https://blockworks.co/news/lido-launches-v2-upgrade">recent improvement to Lido</a> that makes it look even less like a bank is its staking router mechanism, which allows the platform to serve as a sort of hub for a <a href="https://blockworks.co/news/lido-v2-whats-new">marketplace of staking</a> allocation, previously described to Blockworks. As of now, the system utilizes a “very simple governance” to approve modules, podcast host Mike Ippolito explains.



“It approves a target limit. Let&#8217;s say it&#8217;s 1%. Once that 1% essentially gets filled, the overflow goes towards the whitelisted validators that originally were with Lido until you move that up to 2% or something like that.”



This is fine for smaller scale operations, but as of now, Ippolito says that no mechanism exists to allow large-scale institutional stakers to connect with a particular set of validators that have know-your-customer “KYC” requirements — ensuring everything is on the up and up.



Ippolito suggests that a liquid staking as a service model could emerge where the platform acts as concierge, connecting delegators with their preferred validators.



ADCV admits the notion is “interesting,” but ultimately flawed. “Allowing people to customize the exposure to the delegation,” he says, “risks creating centralizing forces inside the staking router itself.”



The goal of Lido, he explains, is to make staking “as easy as possible to as many people as possible” in a “neutral middleware type of structure.”



“You don&#8217;t KYC [Simple Mail Transfer Protocol] servers, when you send emails,” he says. “It&#8217;s very difficult to justify, if you think from first principles, why you would KYC a trustless, permissionless protocol such as Lido, because then you may as well KYC Ethereum.”



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ADCV argues the responsibility to perform KYC — <a href="https://blockworks.co/news/think-tank-crypto-regulation-by-enforcement">complying with FATF, preventing crimes and money laundering</a> as well as supervising centralized custodians and financial services — lies with institutions, not protocols. “There&#8217;s no reason why an institution couldn&#8217;t KYC its customers and use Ethereum, for example,” he says.



<h2 class="wp-block-heading">It’s just not the same</h2>



It goes back to the fact that Ethereum and staking mechanisms are not analogous to traditional finance, ADCV says. “It&#8217;s just not the same. Applying things that apply to money, you&#8217;re going to have a very difficult time, or you&#8217;re going to contort the marketplace into a shape that makes it less useful or less credible.”



“An <a href="https://blockworks.co/news/liquid-staking-ethereum-centralization">Ethereum ecosystem that&#8217;s super centralized</a> is less valuable for everyone,” he says. “That market incentive is there to centralize, and that&#8217;s one of the things that <a href="https://blockworks.co/tag/lido">Lido</a> is so conscious of fighting.”



The “more interesting approach,” ADCV says, would be to engage regulators and “encourage them to run validators themselves.”&nbsp;



“This is so new and so unlike anything else that you need to have a stake in it yourself in order to safeguard the neutrality of the system and to allow your citizens to participate in it equally.”



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Applying TradFi principles to liquid staking would ‘contort the marketplace’

James Cirrone

Deloitte and Chainalysis will become strategic partners in a bid to boost crypto compliance among their shared clients, Chainalysis revealed in a <a href="https://blog.chainalysis.com/reports/deloitte-and-chainalysis-alliance/">statement</a> Tuesday.



Chainalysis told Blockworks the partnership has been in the works for “several years” and will “serve US public sector customers and financial institutions.”&nbsp;



Both Deloitte and Chainalysis declined to offer up specific clients that will benefit from this partnership.



Mutual clients of the two companies can now use Chainalysis’ blockchain dataset, analytics software, and training program, while also taking advantage of Deloitte’s services to manage forensic, investigative and compliance programs, according to the press release.



Deloitte’s <a href="https://www2.deloitte.com/kz/en/pages/strategy-operations/solutions/blockchain-services-and-solutions.html">website</a> said the Big Four firm offers “blockchain services” to its clients. One thing its consultants help with is “defining blockchain goals and objectives,” while also accelerating the building of customers’ “blockchain prototypes.”



Chainalysis will work alongside Deloitte’s digital assets outfit to update clients on risk management, anti-money laundering and know-your-customer (AML/KYC) requirements, and regulatory compliance, among other things.&nbsp;



Chainalysis’ president and chief revenue officer, Thomas Stanley, said the collaboration between his firm and Deloitte on crypto compliance is poised to significantly aid law enforcement efforts.



“For law enforcement agencies, regulators, and financial ecosystem players across the nation, the alliance offers new, collaborative solutions that help identify transformation gaps, accelerate mission success at enterprise scale, and mitigate risk while increasing revenue,” Stanley said in a statement.&nbsp;



<a href="https://blockworks.co/news/deloitte-crypto-hiring-spree">Deloitte has recently signaled increased broader interest in crypto</a>, listing over 300 roles in April 2023 that had to do with digital assets, cryptocurrency tax implications, and even NFTs.



Native crypto firms are also interested in the services Deloitte can provide, with USDC issuer <a href="https://blockworks.co/news/circle-taps-deloitte-as-new-auditor-doubles-down-on-proof-of-reserves">Circle hiring the accounting giant to audit its proof of reserves in January 2023</a>.



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Deloitte, Chainalysis partner up in quest to achieve crypto compliance

A group of US senators has debuted a bipartisan bill focused on money laundering and sanctions compliance that, if approved, would have major implications for decentralized finance protocols.



Senator Jack Reeds, D-R.I., is the sponsor of the bill, the Crypto Asset National Security Enhancement Act of 2023. Sens. Mark Warner, D-Va., Mike Rounds, R-S.D., and Mitt Romney, R-Utah, are co-sponsors.&nbsp;



The bill was read on the Senate floor Tuesday evening, but as of Wednesday at time of publication, the bill text had not yet been publicly released.&nbsp;



According to a draft copy of the bill obtained by Blockworks, the Crypto Asset National Security Enhancement Act seeks to subject DeFi protocols to the same rules as other US-regulated financial intermediaries.&nbsp;



The bill would require anyone who “controls” a DeFi protocol to ensure there are anti-money laundering programs in effect and adhere to know-your-customer (KYC) policies. DeFi protocol controllers would also be responsible for reporting suspicious activity and make sure anyone blocked by sanctions is not using the protocol.&nbsp;



If there is not an identifiable controller of the protocol, the bill states that anyone who invests more than $25 million in developing the protocol would be held responsible.&nbsp;



“Virtual currency kiosks” such as bitcoin ATMs would be required under federal law to abide by KYC laws, the bill proposes.&nbsp;



Operators of such ATMs/machines must “verify and record, at a minimum, the name and physical address of the consumer, which shall include review of an official document evidencing nationality or residence that includes a photograph of the consumer,” the bill states.&nbsp;



This bill comes after past bipartisan efforts to advance crypto rules at the federal level have fallen short. Sens. Elizabeth Warren, D-Mass., and Roger Marshall, R-Kans., introduced the Digital Asset Anti-Money Laundering Act last session. The senators brought the bill to the floor in December, just weeks before the session ended, and the legislation never made it to markup or vote.&nbsp;



Warren and Marshall&#8217;s bill focused on limiting financial institutions’ access to crypto mixing services, privacy coins and “other anonymity-enhancing technologies.” The US Department of Treasury sanctioned crypto mixing service Tornado Cash months before Warren and Marshall introduced their bill.



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New bipartisan bill says DeFi project ‘controllers’ must follow KYC rules

KuCoin is making know-your-customer verification mandatory to better comply with regulations.



The exchange will restrict users who don’t go through know-your-customer, or KYC, registration from accessing certain features. According to a press release, non-KYC users will only be able to use “spot trading sell orders, futures trading deleveraging, margin trading deleveraging, KuCoin Earn redemption, and ETF redemption.”&nbsp;



Withdrawals will still be available, but deposit services will not.



“With the development of the cryptocurrency industry, crypto has gradually moved from a geek towards mass adoption. However, this process has also brought about certain security issues concerning on-chain assets,” KuCoin CEO Johnny Lyu <a href="https://www.businesswire.com/news/home/20230628022769/en">said</a> in a statement.&nbsp;



The new KYC registration goes into effect on July 15.&nbsp;



Binance, in 2021, made a similar move. It <a href="https://www.binance.com/en/support/announcement/important-changes-about-binance-identity-verification-51bf294e26324211a4731ca998e110ca">announced</a> that new users had to go through an “intermediate verification” process to access Binance’s services and products. Through the process, users had to verify their country of residence and nationality and provide a government-issued ID.&nbsp;



KuCoin’s move comes after it faced legal action from multiple countries.&nbsp;



In March of this year, <a href="https://blockworks.co/news/eth-security-alleges-nyag">New York Attorney General Letitia James sued KuCoin</a>, claiming that the Seychelles-based company operated in New York without registering as a securities and commodities broker-dealer.&nbsp;



KuCoin, however, was not the only crypto company targeted by James as the <a href="https://blockworks.co/news/crypto-fraud-needs-order">NYAG cracks down on crypto</a>. 



In June 2022, Canada’s Ontario Securities Commission <a href="https://blockworks.co/news/canadian-regulator-fines-bybit-kucoin-for-securities-law-violations">banned KuCoin from operating in the Ontario province</a> and fined the company 2.1 million Canadian dollars, or roughly $1.6 million.



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