Tag: KYC

KYC & AML: Designed to Resuscitate the Crypto Market

Crypto market stagnated. And let there be no obscuring of that. We are now in a ‘buffer crypto-zone’, waiting for turning points to occur. The entire 2018 was mostly bearish, and today, everyone, including investors and crypto-related business initiators, is expecting the year 2019 to be more crypto-friendly.  New regulations, combined with KYC and AML procedures, are designed to contribute to the flourishing future of the crypto world.  Many critics say that abovementioned ‘duo’, besides being a calling card of company’s credibility, also acts as a ‘double edge sword’ and kills users’ anonymity.  But we have something to say in return: the absence of KYC and AML can kill the entire crypto space. Illustrative statistics of 2017 demonstrates a pretty obvious thing. 2 years ago, when KYC and AML were in their infancy, only 24% of ICOs worldwide had an official legal status. And one more study prepared by Statis Group shows that more than 80% of ICOs conducted in 2017 were identified as scams.  This leads to the conclusion that the appropriate legal support does not protect investors, and does not allow ICO initiators to carry out an ‘exit scam’ scenario.  We must admit that we live in a harsh world, and it’s far from utopian. Users with contrived and malicious intentions have always tortured the crypto world. That’s why regulatory measures must not be neglected. Crypto field has been and, actually, is the great ‘bait’ for fraudsters and criminals, especially when this bait is not essentially regulated.  Let us take, for example, an ICO model, where the money laundering is deplorably flourishing. In simple terms, an ICO takes one’s asset and redeems it for another - a token. These tokens can be freely traded for other crypto or fiat currencies on exchanges worldwide. This system presents a major risk for ICOs. They could easily be used for laundering proceeds of crime.  Many within the industry believe that the future of ICOs may instead lie in security token offerings (STOs). In a nutshell, the STO is an ICO-like investment model. The key advantage of using this route is that token holders are fully protected by the very same financial regulations as used in traditional security-based projects. Self-regulation is needed, but is still hard to be implemented. Max Grain, a Product Management Executive of company Bitlish, explains:  “Scaling brings its own changes and challenges, and a company’s team has to be ready to adapt. Procedures that worked well when you were small may have to give way to a more defined systems and procedures over time as the company grows” Hopefully, not only self-regulations are coming to the crypto market. For instance, in March 2018 the US Department of the Treasury published a letter summarizing its interpretation of the Bank Secrecy Act as it pertains to ICOs. The letter stated that: “Generally, under existing regulations and interpretations, a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with AML/CFT requirements” Last year, European Union also introduced crypto anti-money laundering regulation. Here the regulation applies not to ICOs, but to exchange services between virtual and fiat currencies, and custodian wallet providers which don’t comply with the AML directive.  These businesses become “obliged entities” under the new AML/CTF legislation, similar to traditional financial institutions such as banks. They are obligated to implement measures to counter money laundering and terrorist fundraising, such as customer due diligence (including KYC) and transaction monitoring. They are also required to maintain comprehensive records and report suspicious transactions. The only problem which these regulations entail is that they are not standardized. Andrei Popescu, a Co-Founder of COSS.IO, says AML should be harmonised worldwide: “Despite calls for the adoption of global AML standards for crypto assets trading, no such uniform rules have yet emerged. Differences in national regulations include the existence of special licensing requirements for Crypto Exchanges, the extent to which AML rules also cover administrators and wallet services, the extent to which ICOs are covered by securities laws or equivalent regulations with AML regulatory implications, and the extent to which a crypto-to-crypto exchange is treated differently from crypto-to-fiat exchange. In many cases, the regulatory status of these activities is either ambiguous or case-specific, or is otherwise subject to pending changes in law and regulation” The other side of the crypto-coin is trust. Market needs some time until community will get accustomed to every new regulation and legal improvement. Srdjan Mahmutovich, Kriptomat CEO, states on the issue:  “Crypto space is so fresh and new that no one knows where it all finishes, as we are at the beginning stage. One thing is clear - we do need to put in place more regulation; otherwise we won’t be able to attract all the masses of users to come here. People trust banks. Generally speaking, they do because they use their services on a daily basis. Time will show how much regulation should be put in place in order to secure the user and prevent abuse. Some people, if there`s no KYC, are actually worried, asking whether their assets secured. And that’s what KYC and AML will solve” Evolution is a long-term process, and the crypto market is no exception. We are standing on the verge of a new era – ‘Era of Regulation’ – a crucial period for the crypto world. Backed by harmonized regulation, cryptocurrency will be a great instrument for those who are keeping the interest of the society in mind as a top priority. AML and KYC will help keep it, and what’s more – will help meet it in a fully secure and trustworthy manner.  * This article is based on the exclusive interviews with top-managers of several crypto exchanges. Cryptonomos is most grateful to Andrei Popescu, Co-Founder of COSS.IO, Srdjan Mahmutovich, Kriptomat CEO, and Max Grain, a Product Management Executive of Bitlish.

Articles/January 24, 2019