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KYC REGULATION: Crypto Lawyer Carlo D’Angelo Explains KYCs. Heres What You Need To Know

Earlier this week, the Bored Ape Yacht Club tweeted a cryptic message asking members to complete a KYC (Know Your Customer) in order to take part in their project with Animoca Brands.


“Fuck it, again. http://somethingisbrewing.xyz,” the club tweeted on March 10th.


The Something is brewing link took apes to a website that asked them to connect an Eth wallet and complete a KYC. As the Bored Ape Gazette previously reported, the lack of information concerned some BAYC members.


Since the BAYC’s original post, the club has come out and said that Animoca requires KYC’s on all new projects and that the club is working on something big.


“We wish we could tell you more, but we can’t right now, the BAYC tweeted on March 11th. “The site is mysterious. We get that. We’re building in new ways, and on a scale unlike anything we’ve ever done before. That comes with new responsibilities. But in everything we’ve done, we’ve taken care of the BAYC and MAYC community. That won’t change. We can’t even begin to explain how insane this is going to be. See you on the other side, apes.”


In order to find out more about Know Your Customer requirements, the Bored Ape Gazette reached out to Criminal Defense & Blockchain Lawyer, Carlo D’Angelo.


Check out the Gazette’s interview D’Angelo and find out what a KYC is, why NFT clubs may have to begin asking their members to complete KYCs, and what impact D’Angelo believes KYCs will have on the crypto space going forward.


1. What does KYC mean in legal terms?


“After NTFs, the second most used acronym in the space this week has been KYC. Under United States law, banks and other financial institutions are required to comply with Know Your Customer (“KYC”) regulations when transacting business with consumers. Generally, governments require financial institutions to comply with KYC standards so that they can monitor these consumer transactions for tax reporting purposes and to investigate possible fraud and money laundering offenses.


KYC is basically a process used to verify the identity of parties to a financial transaction. In the centralized business world, KYC is also a due diligence protocol that helps firms properly verify who they are working with. Financial institutions are required to keep KYC records that generally include the name, address, and Tax ID number as well as the amount of money transacted by customers. Federal Anti-Money Laundering (“AML”) laws require financial institutions to disclose the above KYC information when suspicious or fraudulent transactions have been spotted.


2. From a legal perspective, what role do you think KYC requirements play in the BAYC and NFT Space going forward?


"NFT projects who wish to collaborate with centralized brands will likely be asked to comply with KYC standards as a means of bringing trust and transparency to future branding, merchandising and gaming deals. NFT projects may also need to collect KYC information from holders if they intend to comply with SEC and other federal agency regulations.


Without more information from the team, it’s difficult to know exactly why BAYC made their recent KYC announcement. The team tweeted that they have big plans for the community, and it appears that KYC is a critical part of those plans. It could be that BAYC’s legal counsel advised them that KYC compliance will be necessary to execute those big plans or assure the team complies with existing federal laws.”


3. How should Apes and NFT holders feel about submitting to KYC legal requirements?


"The decentralized crypto community, including the NFT space, have traditionally been resistant to KYC requirements. They view KYC as being a direct threat to the pseudonymous nature of blockchain transactions that is essential to preserving the self-sovereignty of decentralized digital assets. Government regulators are putting more and more pressure on crypto entities to comply with KYC because they believe that the pseudonymous nature of the blockchain makes it difficult to tax the space and investigate criminal conduct.


Current federal laws require hosted custodial wallet providers to comply with KYC and AML standards. Consumers often buy their crypto currency on hosted wallet platforms and then move those funds to un-hosted wallets prior to purchasing NFTs. Each of these interactions with hosted wallet platforms thereby triggers a potentially reportable KYC event. Many in the space believe that government KYC regulation of un-hosted wallet platforms presents a grave threat to the continued viability of decentralized crypto currency blockchains.


Under the 2021 Infrastructure Investment and Jobs Act, digital asset transfers in excess of $10,000 will be subject to KYC and IRS reporting requirements. Failure to comply with this law can trigger negative tax consequences and even possible criminal prosecution. This new law goes into effect in 2024 and applies to tax returns and statements required to be made after December 31, 2023. In the meantime, amendments have been proposed to modify this provision of the law and it remains to be seen how this will all unfold.


The growing mainstream adoption of digital assets will likely invite more government regulation intended to protect consumers. Increased regulation will result in further government oversight and put more pressure on digital asset platforms and NFT projects to come into compliance with KYC standards or face the threat of regulatory sanctions and/or criminal prosecution.


As more decentralized Web3 platforms and NFT communities seek to collaborate with centralized businesses, we will likely see more requests for KYC compliance. We can therefore conclude that KYC is here to stay and something that NFT projects will need to comply with if they wish to grow their communities and integrate their brands into the centralized business world."


The Bored Ape Gazette will continue to cover KYC and let you know more about what the BAYC is planning when more information becomes available. To learn more about crypto and the law, follow D’Angelo on Twitter @defidefenselaw.


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