IDnow, the pan-European identity verification platform with its UK office in Manchester, has joined a consortium of five partners including the IOTA Foundation, walt.id, SPYCE.5, and Bloom Labs with the goal of making Crypto Asset Service Providers (CASPs) and self-hosted wallets compliant 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. For example, when a user opens an account and registers a wallet with a CASP, an identification process is required to comply with the new AML Regulation and TFR.
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 tokenizes 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. Furthermore, the trusted party can reveal the identity information, if requested by an authorized party, such as law enforcement, as well as revoke the SBT, if needed.
Within the consortium, the IOTA Foundation, a non-profit foundation supporting the development of the IOTA protocol, 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, a leading open source vendor of decentralized identity and wallet infrastructure, 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.
Bloom, an all-in-one wallet for the IOTA, Shimmer and EVM ecosystem, will provide the capabilities for users to store, present and prove ownership of the SBT. SPYCE.5, specializing in the integration of hybrid blockchain technologies, will provide the essential infrastructure for seamless interchain communication and transaction validation, ensuring the system’s overall efficiency and regulatory compliance.
Rayissa Armata, director global regulatory and government affairs at IDnow, said: “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.”
