The crypto industry is an exciting field where wallets are paramount in safeguarding user assets. These wallets can be broadly classified into two types: custodial and non-custodial. With the growth of the crypto niche, regulatory scrutiny has increased, leading to complex compliance and licensing requirements that must be met.
Thus, there appeared special licences, which are issued by one or another regulatory body in order to confirm the compliance of crypto wallets with the regulatory pre-requisites of the jurisdiction where it is used, which forms the legal framework defining the terms and conditions of their practical application.
This article will shed light on what a crypto licence is and what types exist. You will also learn what a crypto wallet license is and what the algorithm of steps to obtain one is.
What is a Crypto License?
A crypto license is an official authorisation granted by regulatory authorities that permits a company to legally engage in various activities within the crypto industry, such as trading, exchanges, wallet services, brokerages, custody solutions, and mining operations.
Obtaining such a license assures compliance with the applicable laws and regulations of the relevant jurisdiction. It also reflects the company's commitment to transparency, accountability, and responsible business practices, which can help establish trust and credibility with customers, investors, and other stakeholders.
Therefore, obtaining a cryptocurrency license is critical for any business seeking to operate in this rapidly evolving and highly competitive market.
Every enterprise that participates in the realm of crypto topics is mandated to possess the requisite license. This license serves as a guarantee that the crypto company in question is equipped to safeguard its clients' digital assets while also adhering to all relevant laws and regulations.
The categories of crypto licenses available are varied, ranging from exchange and wallet licenses to custodian licenses. The prerequisites for obtaining these licenses may differ significantly from one country to another.
What Are The Kinds of Crypto Licenses?
In the world of cryptocurrency, a wide range of services is offered, and each service has its own specific license designed to meet regulatory and compliance standards. Businesses in this industry must adhere to these regulations and standards to ensure they operate legally and safely.
These are the main types of crypto licenses that can be found in the niche:
1. Crypto Exchange License
A license to operate a crypto exchange or provide exchange services for cryptocurrencies and fiat currencies is a prerequisite for companies looking to offer trading services in this domain. The license enables the holder to facilitate transactions between interested parties in a safe and secure manner.
The exchange services may involve trading of cryptos against fiat money or other cryptos. Obtaining such a license demonstrates the organisation's commitment to adhering to regulatory requirements and industry best practices, assuring the protection of its users' funds and personal information.
2. Crypto Broker License
Possessing a broker license is an imperative requirement for businesses that function as middlemen in the purchase and sale of cryptocurrencies on behalf of their clients. The license holders are obligated to ensure that they have implemented the necessary risk management procedures, comply with market conduct regulations, and report all transactions in a manner that is consistent with financial regulations.
In order to ensure compliance with legal requirements, brokers must execute diligence with regard to all transactions, including the verification of the identity of their clients and the detection of any suspicious activities.
3. Money Transmitter License
Companies that transfer or convert crypto from crypto to fiat or vice versa must obtain a money transmitter license. This license is essential to ensure that these entities comply with the Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CTF) standards.
To become an applicant, it is crucial to keep in mind that there are specific requirements that you must meet. These typically include maintaining a particular level of operating capital and bond requirements and having internal policies in place for consumer protection. You can establish yourself as a trustworthy and responsible applicant by fulfilling these requirements.
4. Mining License
In certain jurisdictions, businesses that participate in verifying transactions on a blockchain network, commonly called mining, may be required to obtain a mining license. This license is a legal authorisation for the business to conduct mining activities within the specified jurisdiction. Companies must know their respective jurisdictions' licensing requirements to avoid potential legal implications.
It's worth noting that even though regulations may be less widespread, licenses can still have requirements for energy consumption standards, equipment compliance, and environmental impacts when necessary. In addition, mining operations may be expected to demonstrate how they manage the rewards and fees generated through their mining activities.
5. Custody License
The license for custody entities is essential in safeguarding digital assets on behalf of their clients. This license is critical in ensuring that clients' funds are secure and their integrity is maintained.
Therefore, obtaining a custody license is crucial for any entity that seeks to uphold the highest security for wallet and protection standards for its clients' digital assets as well as crypto wallet regulation.
To ensure the safety and security of their funds, businesses should implement strong security measures such as utilising multi-signature wallets, cold storage options, and conducting regular audits.
It is also essential to have reliable backup systems and contingency plans to address any potential breaches or losses. By prioritising these security protocols, businesses can protect themselves and their customers from financial harm and maintain trust within the industry.
6. Wallet License
A crypto wallet license is a certification issued to businesses providing digital wallets for storing and managing cryptocurrencies. To obtain this license, wallet providers must demonstrate their ability to securely safeguard private keys and prevent unauthorised access to crypto funds.
This certification is a testament to the provider's commitment to maintaining the highest security and trust standards in the industry. They need to guarantee the confidentiality of user information, which can be achieved through encryption. Additionally, they should have procedures in place for wallet retrieval in case keys or passwords are lost or forgotten.
To obtain these licenses, it is crucial to have a comprehensive understanding of the regulatory landscape and a flexible business model that can adjust to meet these regulations. For companies seeking to operate across various regions, acquiring several licenses and consistently updating their compliance protocols may be necessary to ensure compliance with local laws.
A Crypto License for Custodial & Non-Custodial Wallets
Crypto wallets have different characteristics, purposes of use, cost, and types. At the same time, depending on the type of wallet, it can have different functionality. However, basically, when talking about the licence for crypto wallets, they are classified into custodial and non-custodial.
Custodial Wallets
Custodial wallets function similarly to traditional banks, where a third-party service holds users' private keys for their digital assets. These wallets enable users to store, send, and receive crypto funds without direct control over their private keys.
Famous examples include wallets provided by exchanges such as Coinbase, Binance, and Kraken. Due to their custodial nature, these wallets are subject to strict regulatory requirements, including obtaining necessary licenses, complying with KYC/AML protocols, and implementing robust cybersecurity measures.
Non-Custodial Wallets
Users can exercise complete control over their assets through non-custodial wallets, which provide access to their private keys. These wallets function as gateways to blockchain networks, assisting users in creating and managing private and public keys on their personal devices.
MetaMask, Trust Wallet, and Exodus are examples of such wallets. Since non-custodial wallets do not hold custody of user assets, they are generally not subject to onerous licensing requirements.
The regulatory framework for crypto wallets varies significantly from jurisdiction to jurisdiction and has its own peculiarities. At the same time, as a rule, within the framework of this topic, the main countries that are paid attention to due to the peculiarities of obtaining a licence have formed a certain degree of popularity among businesses interested in such products.
Among these countries are Estonia, Dubai and Lithuania, which offer the following conditions for obtaining a visa.
Estonia
Estonia has adopted a well-balanced approach towards crypto licensing. The licensing fee is set at a reasonable rate of €10,000 and a share capital requirement of €100,000. The licensing process can take anywhere from 6 to 9 months.
Notably, there are no renewal or supervision fees, which helps to reduce the financial burden on crypto enterprises. This approach is similar to Lithuania's, which has also been well-received in the industry.
Overall, Estonia's crypto licensing framework is designed to provide a conducive regulatory environment for crypto enterprises while assuring that appropriate checks and balances are in place to maintain the system's integrity.
UAE (Dubai)
Dubai has emerged as a potential hub for blockchain and crypto enterprises due to its relatively favourable regulatory environment. Non-custodial wallet operators may find the city's licensing requirements reasonably accommodating.
The license application process entails a fee of €25,000 and a share capital requirement of €150,000. Additionally, license holders are responsible for paying a yearly supervision fee of €50,000 and a yearly renewal fee of €25,000 to maintain their license. The estimated timeline for the entire licensing process is approximately one year.
Lithuania
Lithuania presents a more efficient process for obtaining a non-custodial wallet crypto license, devoid of any licensing fees. The setup process is typically completed within a timeframe of 30 to 60 days, subject to a share capital requirement of €125,000.
Of this sum, an immediate payment of 25% (€31,250) is required, while the remaining 75% (€93,750) may be raised within a year. Lithuania's jurisdiction presents an enticing option for both start-ups and established enterprises, given the absence of renewal or supervision fees.
What is The Algorithm for Obtaining a Crypto Wallet License?
Obtaining a licence for a crypto wallet is a challenging task, but by following a clear plan of action, it is more than possible. Therefore, below is a list of sequential steps aimed at taking into account all the peculiarities, nuances, and aspects of the procedure of obtaining a licence for a crypto wallet regardless of the jurisdiction of its use.
1. Regulatory Jurisdiction Selection
The first step in obtaining a crypto wallet licence is to choose the appropriate regulatory jurisdiction. Since today, there are many regulatory bodies in the field of finance, each of which has its own requirements in particular in relation to crypto wallet regulation, as well as individual peculiarities of work, the choice should be based on the analysis of both the needs of the campaign itself offering services for storing crypto assets and the conditions of doing business in a particular region.
2. Crypto Wallet Business Model Selection
The second stage in acquiring a crypto wallet license involves deciding between offering custodial storage services within the company's infrastructure or allowing users to store keys themselves through non-custodial storage. This choice is critical since it determines the company's level of control over its users' private keys, which is a crucial aspect of crypto storage.
Companies that opt for custodial storage are responsible for safeguarding their users' private keys. In contrast, companies opting for non-custodial storage allow users to manage and secure their keys. The decision must be made carefully considering each approach's security risks and potential benefits.
3. Compliance and Due Diligence
Any activity related to the provision of services in the financial sector is strictly regulated by legislative and regulatory documents that ensure not only the safety of the environment in which such activity takes place but also establish a framework that allows to standardise and unify certain aspects of the business.
Thus, encrypted key storage providers must comply with the prerequisites and regulations established by the relevant regulatory authorities, which in turn must not conflict with crypto wallet provider policies and regulations.
4. Local Economic Substance Regulations And Compliance
Adherence to local economic substance regulations is crucial for entities seeking a crypto wallet license. Compliance with these regulations ensures that the license applicant's business activities are aligned with the jurisdiction's economic goals.
Therefore, businesses must understand and adhere to the economic substance requirements and demonstrate that their operations are genuinely based on the jurisdiction of registration. Failure to comply with these regulations may have significant legal and financial consequences. Therefore, ensuring compliance with Local Economic Substance Regulations is vital to obtaining a crypto wallet license.
5. Documents Preparation
This step involves collecting and preparing the necessary package of documents to obtain a crypto wallet license. This package may include a different number of documents required for submission, as its contents directly depend on the requirements of the regulator.
As a rule, the list of basic documents includes an extract from the register of registered legal entities having the right to carry out commercial activities, a certificate of bank account status, a licence to conduct crypto activities (depending on the legal form of the entity) and a number of other documents directly related to the security and legitimacy of the services provided for storing confidential financial information of third parties.
6. Crypto Wallet License Application Filing
This stage is the final one and involves the process of filling out a special form, which, among other things, also has a different form depending on the regulatory authority.
As a rule, the form provides a large amount of information about the company wishing to obtain a licence, as well as detailed data on its activities with all the details and nuances. This process is accompanied by the payment of the necessary fees and commissions for legal support and advice on crypto licensing.
The application for a crypto wallet license is considered unilaterally and depends on many factors and peculiarities of the crypto regulatory authority. Upon completion of the application process, the regulator will decide whether to issue a licence that gives the company the right to legally provide crypto storage services to its customers.
Conclusion
A crypto wallet license is a vital official legal document confirming the company's right to legally engage in the provision of services related to storing users' private keys and providing accessibility of virtual assets of any format. By having such a licence, the company gives its clients a guarantee of security, honesty, and transparency regarding its access to the encryption keys of these wallets.
