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The world of token sales is a rugged one, with little if any cooperation and coordination between governments as to how to approach cryptocurrency regulation. Any entity with a vested interest — including financial institutions, governmental agencies, and the like — have their own approach to how the market should be regulated, if at all.

What Are the Current Regulations?

Take the United States as an example. There are a number of agencies with a finger in the cryptocurrency regulation pie, including the IRS, the SEC, the Commodities Future Trading Commission (CFTC), the Treasury Departments, and various state governments.

On a worldwide stage, the view is even more complex. Some countries — China, for instance — have banned ICOs completely, while others have adopted a more lax policy. Some countries, such as Ecuador, China, Senegal, Singapore, and Tunisia have issued their own government-backed cryptocurrencies, while many more are still trying to make up their mind as to how to proceed.

There’s little coordination between these groups and governments, and as a result, it’s nearly impossible to stay on top of the ever-changing landscape. But one thing is for sure: Regulation is coming, sooner rather than later.

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Why Do Governments Care?

After all, governments are in the business of control. They want to have a say in what happens within their borders, they want to have a say in what happens between their inhabitants and residents of other countries, they want to make sure they’re getting their fair share of profits, and they want to protect their citizens. And, possibly most importantly, they want to ensure that no illegal activities are taking place.

The one and only way to make all that happen is through governmental regulation, particularly Anti-Money Laundering (AML) and Know Your Customer (KYC) efforts. KYC is, in its simplest terms, activities businesses take to identify and verify the identity of their customers and clients.

The goal of AML and KYC efforts is to “take the profit out of crime,” or remove the financial benefits from engaging in crime, thereby eliminating the main incentive. “The rationale… is that it is wrong for individuals and organisations to assist criminals to benefit from the proceeds of their criminal activity or to facilitate the commission of such crimes by providing financial services to them,” explains the International Compliance Association.

Why Are ICOs Such a Target for Regulation?

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Even though the Wall Street Journal estimates that startups generated over $4 billion via ICOs in 2017, that’s not a huge amount in the grand scheme of things. To put that amount in perspective, the United Nations Office on Drugs and Crime estimates that some 2 – 5% of global GDP, or $800 billion – $2 trillion in current US dollars, is laundered worldwide each year.

So why is the crypto market of such concern?

The main reason is that one of the great promises of cryptocurrency was that parties could transact with each other and maintain their anonymity. Of course, this feature led to bitcoin becoming the ideal medium of exchange for illegal goods and services.

In fact, a February 2018 report from Australian university researchers estimates that 25 percent of bitcoin users and one-half of bitcoin transactions are associated with illegal activity. “Around $72 billion of illegal activity per year involves bitcoin, which is close to the scale of the US and European markets for illegal drugs,” the study’s authors state.

Bad actors, illegal activity, anonymity, and an unregulated market. No wonder governments want to regulate token sales and crypto trading.

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Enter, KYC

In the early days of ICOs, startups took full advantage of this anonymity. Payment was conducted in cryptocurrency, so they paid little attention to KYC/AML compliance. But as time progressed, voluntary compliance has become more and more of a concern.

First, adhering to AML/KYC regulations is a badge of legitimacy. It makes sense; if you’re a startup and you go the extra mile to voluntarily comply with AML/KYC, you’re stating you’re one of the good guys.

Next, companies that don’t comply are having trouble finding willing financial partners. “Firms that carry out ICOs and have not carried out KYC and AML checks are finding it difficult to even open a bank account,” says CryptoCoin.News. Many exchanges are also refusing to work with companies that don’t follow KYC/AML guidelines. “Failure to comply is likely to mean that you can no longer use an exchange,” CryptoCoin.News continues.

Roger Haenni, CEO and Founder of crypto startup Datum, wrote a blog post explaining why his company decided to voluntarily comply with KYC/AML regulations. In short, they must verify each buyer’s identity and residency because it’s required by governments, regulators, financial institutions, and other organizations they want to work with. “We spent a lot of time debating the pros and cons of KYC. If we want to interact with other partners in the industry, however, we really have no choice.”

If companies want to be taken seriously, they’re going to need to adopt voluntary AML/KYC compliance.

So, What Do I Do?

For the majority of people reading this article, though, KYC/AML regulations seem like unnecessary hoops to jump through. After all, you’re not trying to engage in felonious behavior; you’re just trying to back the new fintech company you think is on to something hot.

Unfortunately, your intentions don’t matter much. If you want to play in the ICO marketplace, you’re going to have to meet the regulations imposed by the ICO, exchange, or governmental organizations — or all of the above.

In some cases, this will mean providing information such as a passport, drivers license, or other ID to verify your identity, and then back that up with additional documentation to verify your residency. Right now, that information may or may not be passed on to a third party, which further undermines blockchain’s promise of security and anonymity.

Fortunately, better solutions for identity management are on the horizon. One example is SelfKey.The company works on two fronts. For token sales and exchanges, the company provides a blockchain-based compliance platform capable to identify and screen customers with the highest KYC & AML/CTF standards in an efficient and secure manner, and a Self-Sovereign Identity (SSID) wallet for consumers. The digital wallet allows individuals to control and manage sensitive identity data and documents at all times, while going through KYC process with just a few clicks.

Companies like SelfKey demonstrate the true power of the trustless blockchain technology; you can comply with regulations without surrendering privacy and individual rights.