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Increasing Transparency in Crypto and Digital Asset Trading Markets with the LEI

Elsa Madrolle, General Manager Europe at VerifyVASP, explains the role that the Legal Entity Identifier (LEI) plays in promoting trust and transparency across the virtual asset ecosystem, and the drivers for becoming a Validation Agent (VA).

Author: Elsa Madrolle, General Manager, Europe at VerifyVASP

  • Date: 2023-11-27
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GLEIF’s Validation Agent Framework enables financial institutions and other supervised organizations involved in legal entity identity verification and validation to obtain and maintain LEIs for their clients in cooperation with accredited LEI issuers. Validation Agents achieve this by leveraging their ‘business-as-usual’ client identification procedures in Know Your Customer (KYC), client onboarding, or standard client refresh update processes.

In May 2023, VerifyVASP, a Singapore-based RegTech solution provider to Virtual Asset Service Providers (VASPs), became the first Validation Agent to operate exclusively in the crypto and digital asset trading space.

With the recent Singapore Fintech Festival bringing together industry leaders to explore - among other issues - how the latest digital asset technology is enabling a more inclusive and open financial system, Elsa Madrolle, General Manager Europe at VerifyVASP, explains the value of the LEI and VA role for digital and crypto-assets.

What are the key regulatory trends impacting the crypto and digital asset trading markets?

The Financial Action Task Force (FATF)’s Recommendation 16 aims to mitigate money laundering and terrorism financing risks associated with the transfer of assets with a focus on ownership identification. In a 2019 update, FATF required that its 200+ member or affiliated countries implement regulation mandating that financial institutions and crypto firms involved in virtual asset transfers also acquire and exchange precise and reliable personal details of the originator and beneficiaries of the transaction before or concurrently to the transfer. This application of Recommendation 16 is also colloquially known as the Travel Rule.

The private sector and several jurisdictions globally have been working on aligning with FATF’s Travel Rule requirement, and we are starting to see the first implementations. Notably, the European Union adopted the Markets in Crypto Assets (MiCA) regulation in May 2023, bringing together crypto assets, crypto asset issuers, and crypto asset service providers under a single regulatory framework. MiCA addresses the FATF Travel Rule by extending the scope of the existing EU Transfer of Funds Rule (TFR) to include transfers of crypto assets. Both will be applicable from 30 December 2024.

Other jurisdictions around the world that have already aligned regulation with FATF’s requirements include the US, Canada, Singapore, Korea, Japan, Switzerland, Hong Kong, and the UK, with many more to come in 2024-2025.

What were the drivers for VerifyVASP becoming a Validation Agent?

We are committed to facilitating full compliance with Travel Rule regulations across multiple jurisdictions. We recognize how LEI data can greatly streamline VASP identification and facilitate counterparty due diligence, supporting our clients to ensure Travel Rule compliance and enabling them to get ahead of emerging regulatory frameworks.

As a Validation Agent, we are incorporating clients’ LEIs into our decentralized messaging service to provide the verified entity identification data needed for easy and early compliance with current and anticipated regulatory requirements. The result is a new level of trading entity transparency in crypto and virtual assets that spans borders and jurisdictions.

We also support the broader adoption of the LEI within virtual asset trading markets through our VA role, helping facilitate legitimate digital asset transactions from service providers and crypto-asset issuers.

Why should VASPs consider obtaining an LEI?

Counterparty due diligence is a significant challenge for VASPs due to the sensitive nature of the originator and beneficiary information required by the Travel Rule. The FATF has indicated that potential reliable and independent sources of information for verifying the identity and beneficial ownership of legal persons and arrangements include corporate registries maintained by competent authorities, lists of regulated institutions, and LEI data (available within the Global LEI Index).

We see evident benefits of the LEI to simplify counterparty due diligence. It delivers consistent, high-quality, and globally recognized entity identification, greatly helping both financial market supervisors and participants to assess exposure across marketplaces. The LEI code contains a record of information about the company, including its identity and group structure. And as the LEI has its own independent validation process to verify the accuracy of the data, the use of the LEI as common market practice is increasingly supported by regulators and organizations across the globe.

Another consideration is that when conducting virtual asset transfers, regulations, including the EU's Transfer of Funds Regulation, require the use of LEI (or any equivalent official identifier of non-individual originator or beneficiary) to allow better identification of parties involved.

Given the inclusion of the LEI in emerging regulatory frameworks for crypto and digital assets is a trend we can expect to continue, VASPs should prepare accordingly.

How robust are VerifyVASP's Know Your Customer (KYC) and counterparty due diligence procedures?

Our KYC process is largely modeled on the FATF Recommendations and adheres to stringent standards akin to those used for correspondent banking relationships. Any VASP looking to join our network must first pass comprehensive due diligence based on the Wolfsberg Group's Correspondent Banking Due Diligence Questionnaire (CBDQQ), which has been adapted for the virtual assets industry. This process includes asking VASPs to provide an LEI if available.

Becoming a VA affirms our commitment to ensuring the most robust counterparty due diligence, delivering increased transparency and trust across crypto and digital assets.

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About the author:

Elsa Madrolle is General Manager, Europe at VerifyVASP, where she guides corporate strategy and execution as well as client and regulatory engagement for the European markets. She has an extensive background in traditional capital markets, working for global banks JPMorgan and Deutsche Bank. She also helped institutional clients meet new regulatory requirements under Dodd-Frank and EMIR for cleared derivatives at the leading exchange CME Group. In recent years, prior to her current role, she has been working in go-to-market strategy and execution for tokenization and AML compliance projects in the blockchain industry. She holds an MBA from Georgetown University and a Chartered Alternative Investment Analyst designation.

Tags for this article:
Data Management, Data Quality, Open Data, Global LEI Index, Global Legal Entity Identifier Foundation (GLEIF), Know-Your-Customer (KYC), Validation Agents