Regulatory Considerations for Institutions

Introduction 

As institutional involvement in digital assets continues to grow, so does the need to navigate a complicated and often shifting regulatory landscape. Unlike traditional financial markets, which have well-established rules, the world of cryptocurrencies is still evolving in terms of legal and compliance frameworks. Institutions must understand the regulatory considerations that come with engaging in the crypto space, from anti-money laundering (AML) requirements to how securities laws apply to tokenised assets. This guide outlines the key regulatory considerations institutions need to address to ensure compliance and manage risks effectively. 

Key Regulatory Areas for Institutions 

Anti-Money Laundering (AML) and Know Your Customer (KYC) Compliance

AML and KYC regulations are designed to prevent financial crimes such as money laundering, fraud and terrorism financing. Institutions dealing with digital assets are required to follow strict procedures to verify the identity of their clients (KYC) and monitor transactions for suspicious activity (AML). 

For institutions, this means implementing compliance protocols that involve collecting and verifying customer information and ensuring that their clients are not engaging in illegal activities. Many jurisdictions, including the US, EU and UK, require crypto businesses to adhere to AML/KYC regulations, which are regularly updated to close loopholes and combat illicit activities in the crypto space. 

Failure to comply with these regulations can result in significant fines, sanctions and even legal action. 

Securities Regulations

One of the most complex regulatory considerations for institutions is determining whether a crypto asset is classified as a security. In many cases, tokenised assets—particularly security tokens—fall under the same regulatory frameworks as traditional securities. 

For example, in the United States, the Securities and Exchange Commission (SEC) applies the Howey Test to determine whether a token qualifies as a security. If it does, the issuer must comply with securities laws, including registration and disclosure requirements. Failure to do so can lead to penalties and restrictions on trading these assets. 

The FCA regulates crypto-related securities in the UK by ensuring that firms dealing with security tokens comply with regulations around transparency, anti-money laundering (AML), investor protection and proper conduct, similar to traditional financial instruments, to maintain market integrity and safeguard investors in the evolving digital asset space. 

For institutions planning to issue, trade or invest in tokenised assets, understanding how securities laws apply to digital assets is critical for staying compliant. 

Jurisdiction-Specific Regulations 

One of the main challenges institutions face in the crypto space is the differing regulatory requirements across jurisdictions. Each country or region has its own approach to regulating digital assets, making compliance a complex task for institutions operating globally. 

• United States: The SEC oversees the regulation of security tokens and digital assets that meet the criteria for securities. Additionally, the Commodity Futures Trading Commission (CFTC) regulates cryptocurrencies classified as commodities, such as Bitcoin and Ethereum. The Financial Crimes Enforcement Network (FinCEN) also plays a role, ensuring that crypto firms comply with AML and KYC regulations. 
• European Union: The Markets in Crypto-Assets (MiCA) regulation is set to provide a harmonised legal framework across EU member states, bringing clarity to the issuance and trading of digital assets. MiCA will regulate areas such as stablecoins, security tokens and DeFi, ensuring investor protection and market stability across Europe. 
• United Kingdom: The FCA takes a cautious but forward-looking approach to tokenisation in the UK. While recognising the potential to bring efficiency and innovation to financial markets, the FCA ensures that any activities involving tokenisation adhere to strict regulatory standards.
  
  These include anti-money laundering (AML) rules, know-your-customer (KYC) requirements and securities laws, ensuring that tokenised securities are treated similarly to traditional financial instruments. The FCA's strategy is to balance allowing innovation while maintaining robust investor protection and market integrity. 
• Singapore: Securities and Futures Act (SFA): Under the Monetary Authority of Singapore (MAS), tokens that represent securities, such as shares or bonds, must comply with the SFA, which governs public offerings and securities markets. For Digital Token Offerings: MAS has issued guidelines for the offering of digital tokens, requiring compliance with securities laws if tokens exhibit characteristics of securities. 
• UAE: ADGM and DIFC Regulations: In the UAE, tokenised securities are regulated by the Financial Services Regulatory Authority (FSRA) at ADGM and the Dubai Financial Services Authority (DFSA) at DIFC. The UAE Central Bank and the Securities and Commodities Authority (SCA) oversee cryptoassets in mainland UAE, with the Central Bank regulating tokenised payments. 

Financial Promotion Regulations

When promoting digital assets to investors, institutions must comply with financial promotion regulations, which are designed to protect retail and institutional investors from misleading or deceptive practices. These regulations typically require that any marketing or promotion of financial products, including cryptocurrencies and tokenised assets, be fair clear and not misleading. 

In the UK, for instance, the FCA requires firms to provide clear disclosures of risks associated with digital assets in any promotional material. Institutions that fail to meet these standards can face penalties and restrictions on their ability to market to investors. 

Tax Compliance

Institutions must also navigate the complexities of tax compliance when dealing with digital assets. The tax treatment of cryptocurrencies and tokenised assets varies widely by jurisdiction, and institutions must ensure they meet local tax obligations. 

In many countries, gains from trading digital assets are subject to capital gains tax, while in others, different tax structures may apply depending on how the assets are classified (e.g., commodities, securities or property). Institutions must also account for the tax implications of cross-border transactions, staking and DeFi activities, which add further complexity to their tax strategies. 

Data Privacy and Security

The regulatory environment surrounding data privacy and security is also evolving, especially with the increasing use of blockchain technology. Institutions handling customer data as part of their crypto activities must comply with data protection laws such as the General Data Protection Regulation (GDPR) in Europe. This means ensuring that personal data is securely stored and processed, and that institutions have measures in place to protect data from breaches or misuse. 

In addition to data privacy, institutions must also adopt robust cybersecurity measures to protect digital assets from hacking, theft and other risks. Regulatory bodies are increasingly focusing on ensuring that institutions have adequate safeguards in place to protect against cyber threats. 

How Custody Providers Help with Compliance 

For institutions, working with a regulated digital asset custodian can simplify the process of staying compliant. Custody providers, like Archax, are designed to meet strict regulatory standards for managing digital assets. They offer storage solutions, ensure compliance with AML and KYC requirements. 

By partnering with a regulated custodian, institutions can reduce the risks of non-compliance and ensure that their assets are managed according to local and international regulations. 

The Importance of Global Collaboration in Regulation 

As digital assets become increasingly global, there is a growing need for international cooperation between regulators. Institutions operating across borders must be aware of the differing rules in each market, but as regulators harmonise their approaches—such as with MiCA in the EU—institutions will benefit from clearer and more consistent regulations. However, until such harmonisation is fully realised, institutions will need to maintain a strong focus on cross-border compliance and legal strategy. 

To Sum It Up 

Navigating the regulatory landscape in the crypto space is complex and varies widely across jurisdictions. Institutions must comply with AML/KYC rules, securities regulations, tax obligations and financial promotion laws to avoid penalties and maintain legitimacy. Partnering with a regulated custody provider helps institutions stay compliant and manage their digital assets securely.