Three Reasons Why Cryptocurrencies Can Flourish Thanks to KYC

In Depth Opinion

KYC and AML compliance may be at odds with the philosophy of cryptocurrency issuers, but they are the only way to bring their product to the mainstream.

The crypto industry has long been associated with criminal activity and fraud. While many find it an attractive means for investment, some are also reluctant due to its reputation for attracting criminals such as money launderers and terror financing groups.

Regulators across the world have been urging crypto companies to adopt KYC (Know Your Customer) and AML (Anti Money Laundering) procedures to avert such activities. On one hand, this pursuant imploring has been met with considerable resistance from many cryptocurrency exchanges, on the other, a lack of regulation made investors reluctant about investing in digital currencies, resulting in a shocking drop of 75% in the cryptos investments.

This points towards a need for cryptos to adopt KYC and AML measures. Currently, only a handful of exchanges are using a KYC system to verify its investors. The rest offer complete anonymity to traders, thus making it an attractive mode of moving illegal money for criminals. This keeps financial regulators and governments on edge and thus the constant urgency from their side to keep the space more regulated.

Why is KYC/AML Used in Traditional Finance?

Investors generally prefer to invest in conventional securities, as they are regulated by a national authority or a central bank. Moreover, the financial services sector has been rapidly adopting KYC and AML procedures to verify its investors. Such measures make investors more confident about investing in traditional securities as they are more reliable. KYC/AML regulations have been a result of FATF’s (Financial Action Task Force – the global financial regulator) crackdown on money laundering activities, particularly those used for terrorist financing.

Implementing AML laws and regulations enables governments to keep a lid on financial crimes. However, ever since the inception of bitcoin, the regulatory bodies have been in a bind as to how digital currencies can be made a safe investment platform for traders. As crypto wishes to keep the identities of their investors anonymous, they also face an increasing amount of pressure to get regulated.

The answer to their predicament lies somewhere in building a smart but reliable KYC system. Some of the ways in which such a KYC system can help cryptocurrencies flourish include:

Attracting a Wide Range of Investors:

At present, only those who are enthusiastic about cryptocurrencies, invest in them. As mentioned before, the lack of regulation makes more conservative investors reluctant to invest in cryptos. By complying with KYC and AML regulations, cryptos can attract more investors and build confidence among them.

KYC verifications primarily enable companies to verify the identities of investors and make sure they are not using fraudulent or stolen credentials. This is also congruent with the core principle of blockchain technology i.e. building trust. KYC can establish a sense of trust among investors and enable them to invest freely.

Protecting Investors From Fraud:

Building a KYC system can also enable crypto exchanges to protect their investors from fraudulent activities. When a crypto exchange makes an effort to verify its customers, they make sure that the person making the investment has legitimate credentials. Fortunately, there are now some KYC service providers that allow digital authentication of users through document scans and facial recognition.

Such identity authentication measures allow cryptos to verify their customers, all the while keeping their identities and data secure. Such services also offer AML screening of investors. AML screening can scan an individual’s name through global watchlists in real-time and enable the company to check whether they are being watched by any government or financial authority for illicit activities.

Establishing Trust Amongst Regulators:

AML laws and regulations have always been a bone of contention between regulators and crypto exchanges. While financial institutions fight tooth and nail to comply with such laws, exchanges tend to avoid them altogether. However, more recently, the Securities and Exchange Commission (SEC) has brought down more stringent rules on crypto exchanges operating in the US.

In the wake of it, they are now liable to implement KYC and AML verifications. In addition to that, the crypto industry has introduced an even safer instrument than the ICO, namely, the STO (Security Token Offering). A security token is required to be registered with the SEC, which makes it safer to invest in. Many crypto companies have been coming around to KYC and AML regulations, as they tend to increase investor confidence. Thus, it has also been a way for them to rejuvenate trust amongst regulatory authorities and establish their legitimacy.

KYC and AML procedures may not be what is aligned with the philosophy of cryptos, but they seem to be the only way for them to bring their product to the mainstream and strengthen acceptance. Moreover, anti-money laundering laws and regulations exist to thwart illicit activities and dangerous crimes. A robust AML and KYC system can enable the crypto industry to prevent fraud and protect its investors.

About the author

Victor Fredung

Victor Fredung

CEO of innovative ID Verification company Shufti Pro - Victor Fredung, has many years in the payments field and has founded several successful fin-tech companies. Owning and operating several payment companies gave Victor a great insight into the troubles that a lot of companies are facing and what needs to be built to solve them.

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