In 2018, the European law enforcement agency Europol issued an assessment that, despite moves towards increased regulation in the sector, criminals continue to use digital currencies to facilitate their illegal activities.
Due in part to their largely unregulated nature, as well as the level of anonymity they provide to traders, cryptocurrencies present an attractive opportunity for the perpetrating fraud.
During the past two years, a significant number of fraud cases have arisen in connection with ICOs, as well as with other methods of fund-raising and investment, used in the crypto sector.
However, despite constant urging from financial watchdogs to take precautionary measures, many crypto projects, particularly ICOs, have failed to fail to enact appropriate anti money laundering measures. Thus, the lack of rigorous KYC/AML compliance remains the most prominent reason for the failure of ICOs.
In 2018 alone, US$23 million dollars of investor’s funds were lost every day to bitcoin and cryptocurrency scams. While frauds and scams are not the only reason for ICOs to fail, they remain the most glaring one.
This fact is even more troubling given that effective preventative measures are easily available and can be put in place with minimal effort required on part of a company or exchange.
In response, many crypto companies claim that requirements like KYC or AML compliance infringe on the right to privacy of their investors – and that this right to privacy is what constitutes the unique selling proposition of crypto projects in the first place.
Why is Compliance Opposed by Crypto?
One of the major reasons ICOs were an attractive way for startups to generate funds for their project or business was the fact that they were largely unregulated.
Old school IPOs have a ton of regulations attached to them, burdening businesses with extensive regulatory and legal procedures, before they can even begin their fundraising process.
However, it was clearly this very lack of regulatory procedures and compliance measures that attracted a number of scammers and financial criminals to the ICO model.
Observing this significant increase in ICO scams, global financial regulators became increasingly wary of crypto exchanges, and indeed, the entire crypto industry. This rather dim view of the crypto industry led to the official regulation of crypto-based securities by the SEC in the US.
These, and similar, regulations were initially opposed and staunchly resisted by the crypto sector. Despite this initial opposition, industry players soon resalised that robust compliance and regulatory measures were the only way to curb the wide-spread fraud that was tarnishing the reputation of the crypto sector.
Why should ICOs comply with KYC/AML regulations?
Capital raising through ICOs peaked, at the start of 2018, at an astounding US$2.2 billion dollars. Following this euphoric peak came an abrupt decline in investment, which dropped more than 80 per cent, as regulatory requirements tightened.
There are numerous benefits ICOs stand to reap by complying with KYC/AML regulations, but perhaps the most significant ones include:
• Build Credibility With Banks
First and foremost, any company wishing to conduct an ICO, but unwilling to comply with AML regulations, will find it extremely hard to avail themselves of even the simplest services, such as opening a bank account.
Thus, engaging the services of an AML compliance provider can help to assure banks of the credibility of your business and provide a foundation of trust between the two parties. It can also help both parties track the details of an investor, in case of any discrepancies, or if proof of illicit activity emerges.
• Enhance Public Outreach
When a company establishes proper procedures for regulatory compliance, it enhances the perception of the company as being trustworthy and transparent, and thus, serves to strengthen its reputation and expand its public reach.
It allows a business to reach out to established investors, with credit and reliability, and thus increasing the legitimacy of the ICO model.
The idea that ICOs are unregulated, a veritable breeding ground for fraud and financial crimes, has generated a lot of bad press for the crypto sector.
Thus, legitimizing practices by implementing a robust compliance structure can help establish and increase the reputation of a company as trustworthy. In turn, this can empower businesses to expand their reach in terms of attracting high-quality investors for their startup.
• Avoid Heavy Penalties
Non-compliance on part of a business, or a bank, can lead to fines that may amount to millions of dollars. Companies that choose to push ahead with their ICO, without any regulatory compliance measures in place will, at the end of the day, probably only end up hurting themselves.
In such cases, if any illicit activity is traced by a regulator to the ICO, the company will end up paying heavy penalties for failing to comply with AML regulations in the jurisdictions it operates in.
In short, the most compelling reason for any company conducting an ICO is to avoid incurring millions of dollars in fines from global regulatory agencies and the resulting blow to its reputation.
Efficient KYC/AML Solutions
To enhance the whole KYC and AML regulation process, companies need to adopt better procedures to implement them. The fraud prevention market is now offering tech-savvy solutions that can verify ICO investors within seconds.
Fraud prevention companies, such as Shufti Pro, offer software as a service (SaaS) products that can provide KYC verification services for a range of different industries.
Such companies can provide online identity verification methods which can effectively establish the legitimacy of an investor and thus enable an ICO to run smoothly and securely.
ICO projects can further protect themselves by engaging a fraud prevention company to perform AML background checks. These checks screen an investors name through global watchlists to check if they are known for any financial crimes.