Are you a business owner planning to provide digital asset services in a specific location? Well, you cannot do that unless you have an official regulatory authorization granted by a government or financial authority. This is basically called a crypto license.
It requires your company to verify customers’ identities and conduct all transactions within the legal limits of the jurisdiction in which you operate.
In today’s article, we’ll talk about why getting the license is non-negotiable if you’re into the crypto business. Let’s start.
Why Crypto Licensing Is Needed
The first and most obvious reason for crypto licensing is legal compliance. Operating a business without proper authorization violates not only local but international financial laws. It could even lead to heavy fines or criminal action against the owner.
Licensing also compels companies to stop engaging in illicit activities such as money laundering or terrorist financing. Since you’d be managing large sums of money for your clients, the regulation will ensure your business is doing everything it can to prevent user losses from hacks or insolvency.
And obviously, holding a license will build credibility with retail users and traditional banks. It will be easier for you to open corporate bank accounts whenever you want.
Types of Crypto Licenses
Now, a crypto license is not one-size-fits-all. Instead, they vary based on the specific services your company offers.
For example, we first have the Crypto Exchange License that permits trading cryptocurrencies for fiat currency or other digital assets. Next, the Custody/Wallet Licenses authorize your business to hold, protect, and manage clients’ private keys or digital assets.
We then have the Crypto Trading License that allows you to execute trades. You can even act as an intermediary for buyers or sellers. And the Token Issuance License is required for launching Security Token Offerings (STOs) or Initial Coin Offerings (ICOs).
Lastly, the Lending, Borrowing, or Derivatives Licenses are required for businesses that focus on niche-specific financial operations of digital assets.
Importance of Working with a Consultant
Instead of making those complicated decisions on your own, you can take help from a consultant to navigate the regulations easily.
For example, a consultant will help you choose the right regulatory framework based on your unique business model. Payment processors also require proof of real-time monitoring before they open fiat-to-crypto accounts. An expert can help you meet all these standards.
They will even set up mandatory Anti-Money Laundering (AML) and Know Your Customer (KYC) systems from day one.
How to Apply for the License
It varies by location, but in the US you must navigate a dual regulatory framework at both the federal and state levels.
To meet federal requirements, you need to form a legal business entity such as an LLC or corporation. Then apply for an Employer Identification Number from the IRS. You also need to build transaction-monitoring procedures and follow compliance programs so you can demonstrate your track record to relevant financial authorities.
In the U.S., most states classify crypto-to-fiat activities under Money Transmitter Licenses. So you need to apply for state-by-state licenses in jurisdictions where your customers reside.