The Role of Data in Crypto Compliance

Could you share some background on how the compliance landscape has evolved for crypto since 2017?

Georg Brameshuber (GB): Absolutely. Back in 2017, compliance in crypto was in a different arena. Nobody really cared about KYC back then; it was unbelievable. Now we’re in 2024, and KYC was always an elephant in the room, but fundamentally it was a totally different landscape. There was a lot of legal uncertainty, and while there was excitement around ICOs, the space lacked clear guidelines, making it difficult to manage red flags. Now, KYC and AML are essential for any crypto business, and compliance has become the first step for companies to navigate today’s crypto market.

You mention that data is vital to this process. Why does managing blockchain data feel so complex?

GB: Everything in Web3 produces data, which creates significant challenges. It’s really a pain to have oversight of all data that’s economically relevant. Take crypto gaming, for instance—it produces data that, in many cases, nobody really needs. But for compliance purposes, especially with KYC and AML, it’s essential to identify and organize economically relevant data into a comprehensive, accurate form. This is especially critical for creating coherent transaction histories for tax and regulatory requirements. With such a large volume of data, this task can be overwhelming and complex to manage.

So, how does this data complexity impact crypto tax and accounting?

GB: In crypto tax compliance, all transactions need to be accurately documented. Companies have to be tax compliant, and of course, they have to meet KYC and AML requirements. Most of these obligations are served by a comprehensive set of transactions that are complete and accurate. If data isn’t organized well, companies encounter issues in tax reporting and even face challenges when trying to cash out assets. Compliance isn’t only about meeting legal requirements; it’s also essential for bridging with traditional finance, where data needs to align with corporate accounting standards.

Can you elaborate on what bridging compliance with traditional finance involves?

GB: Certainly. We have to bridge across physical borders because even crypto-native companies interact with traditional finance in some way. To draw a clear line between crypto and corporate accounting, blockchain data needs to be formatted to meet conventional financial standards. This process is essential as it allows crypto firms to scale and operate in the broader market without encountering compliance barriers, especially in banking or investment contexts.

How does European regulation, like MiCA, affect crypto compliance?

GB: MiCA’s purpose is to place a central counterparty in crypto transactions, which contrasts with Satoshi’s vision of decentralization. It’s more or less traditional finance practices being transformed into the new realm of crypto and Web3. Decentralized protocols like smart contracts and peer-to-peer transactions still fall outside MiCA’s scope. There’s a balancing act here between regulation and innovation, where decentralized models face fewer centralized controls but still have to meet compliance standards, especially when interacting with traditional markets.

Is there potential for emerging technology to help manage these challenges?

GB: Yes, absolutely. Zero-knowledge proofs and real-time blockchain reporting are examples of what’s being explored. Zero-knowledge proofs, for instance, allow for verification without revealing private details, and blockchain generally serves some of the fundamental compliance requirements. Real-time transaction data on blockchain could streamline compliance, as seen in projects where blockchain is used for VAT compliance. The key is finding technologies like zero-knowledge proofs that simplify verification while maintaining privacy.

You mentioned challenges with identifying relevant data for compliance. Can you expand on this?

GB: The main challenge is categorizing what data matters for compliance. In Web3, not all data is useful, and tracking and tracing Web3 transactions in a comprehensive form gives an investor or firm an informed opinion on transactions. To navigate this, companies need the right tools and strategies to filter out unnecessary data and focus on what’s needed to create reliable, auditable records.

What advice would you give to professionals looking to improve crypto compliance?

GB: Prioritize organizing data in a way that’s both comprehensive and compliant. The truth is in the data, and that presents an opportunity for stakeholders to thoroughly review transactions. With properly structured data, firms not only meet compliance but can also optimize tax positions and build credibility with regulators and investors alike.