As the cryptocurrency industry continues to expand, data privacy is becoming an increasingly important issue for crypto-asset service providers.
Managing large amounts of personal and transactional data on a daily basis presents unique challenges in the crypto ecosystem, especially due to the decentralized nature of blockchain technology and the rapidly evolving regulatory environment. Customer data typically originates from both on-chain sources — such as transaction data, smart contract activity, token balances and network statistics — and off-chain sources like Know Your Customer information, payment details and customer support interactions.
For many CASPs, which have yet to establish corporate structures as institutionalized as banks, this poses a significant challenge in ensuring consistent privacy protection. Moreover, within companies, the varying data collection needs of different business units further complicates efforts. For example, marketing teams may collect behavioral data from websites or apps, while compliance teams manage KYC data and transaction metadata.
This diversity in data handling can lead to inconsistencies in privacy practices and protection measures.
Additionally, many CASPs operate on a global scale. The inclusion of customers from different countries and their transaction activities brings about complex issues such as cross-border data transfers and the need to comply with international laws, like the EU General Data Protection Regulation or the California Consumer Privacy Act.
It seems while the principle of blockchain's immutability is a strong argument for transparency among system participants and a selling point to attract more people to the system, the conflict with regulations such as the GDPR's "right to be forgotten" has become a problem for those developing blockchain-based business models. Balancing the principles of decentralization with privacy and regulatory compliance requires innovative solutions.
The EU's Markets in Crypto-Assets Regulation represents a significant milestone. The legal framework, which becomes fully applicable starting 30 Dec. 2024, regulates the crypto industry and defines CASPs as legal entities providing professional services like trading platforms, wallet providers and custodial services.
It also imposes certain legal compliance obligations on CASPs. Article 101, for instance, reinforces the necessity for comprehensive data privacy measures by directly linking these obligations to GDPR standards. In line with GDPR compliance, CASPs must implement strong encryption techniques to protect personal data, conduct regular audits to ensure ongoing compliance, and adopt privacy-by-design principles that integrate data protection into system architecture from the outset.
Additionally, under MiCA, CASPs are required to track and report transactions in compliance with KYC and anti-money laundering regulations. These requirements necessitate both transparency and the ability to demonstrate adherence to legal standards.
Sanction Scanner's 2023-2024 Financial Crime and Compliance Report shows data breaches are among the most significant risks faced by CASPs. According to the report, 28% of crypto service providers identified cyberattacks and data breaches as major risks. The 2020 data breach of crypto wallet firm Ledger is a striking example of these dangers. The breach exposed personal information, including email addresses, names, phone numbers and physical addresses, of 270,000 customers. It occurred due to inadequate security measures and excessive data collection, severely damaging the company's reputation.
To meet these cyberthreats and MiCA's stringent requirements, CASPs must establish robust data governance frameworks that ensure transparency, reduce risks and enhance operational resilience. This includes developing a dedicated risk management function to address threats like money laundering, terrorist financing and cybersecurity risks.
In an increasingly regulated environment, effective data governance is no longer optional — it is essential. Strong frameworks help CASPs comply with complex regulations, prevent data breaches and build customer trust in an environment where security and transparency are critical.
It may be thought that tight cybersecurity and data protection measures, like those applied in other modern organizations, would be sufficient to solve these data protection issues for CASPs. However, it should not be forgotten that these companies operate in a highly competitive environment where customer-centricity is paramount and entry and exit from the sector are relatively easy.
Customers' expectations — such as the speed of crypto transactions, the simplicity of the onboarding process, and assurance against fraud or misconduct — take the data processing obligations of these companies far beyond just data protection. Monitoring customer reactions to even a one-second delay in transactions on social networking platforms is far from enjoyable. These companies need to evolve not only as tech-savvy entities but also as organizations that continually enhance their data-centric maturity.
CASPs must ensure data processed in KYC and anti-money laundering processes, marketing efforts or new product launches is also utilized to strengthen the data protection structure. Of course, this should be done while adhering to GDPR requirements and supporting customer expectations regarding transaction quality.
At this point, a holistic data governance framework, managing data throughout its life cycle, is essential to overcoming both technical and regulatory challenges. This approach helps CASPs not only protect customer data but also ensure compliance in a dynamic regulatory landscape.
As technology evolves and customer expectations shift toward faster and more reliable services, CASPs must move beyond merely protecting data. Instead, they should leverage data governance frameworks to generate value. Integrating data privacy into broader governance strategies and utilizing analytics and artificial intelligence can open up new opportunities, allowing companies to stay ahead in competitive markets.
Effective data governance is more than compliance
It is clear data governance is not just about compliance. It's about aligning privacy with business objectives. Integrating privacy into your business strategy helps build trust with customers, attract more users, and gain a competitive advantage in the crypto sector.
Regulations like MiCA, the GDPR, and the Digital Operational Resilience Act are shaping the industry and CASPs must adopt a robust privacy framework to protect customer data and ensure compliance.
Effective data governance practices will help CASPs not only comply with privacy rules but also become more data-driven organizations, building trust, maintaining operational resilience and staying ahead of the competition.
Gokhan Polat is the founder of Clovera.io.
