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KYC, AML, and Cryptocurrencies

February 12th 2018

There is no denying the fact that cryptocurrencies are big right now. Almost everyone seems to be talking about the revolutionary market that has caused great disruptions in the financial sector. The daily news is often dominated by crypto-related topics as something new appears to be happening in the space almost every moment. Despite the popularity of the system, it is not without its detractors who say that it supports criminal and illicit activities. Since the middle of 2017, there have been renewed government efforts to regulate the market. The majority of these efforts have been centered on KYC and AML regulations.

KYC and AML

KYC stands for “Know Your Customer.” It is a process of obtaining relevant identifying information about the customers of a service. The platform that provides the service will mandate all customers to submit appropriate identification documents like photo IDs, bank accounts, credit card information, residential address, utility bills etc.

The purpose of KYC is mainly to ensure that unqualified people are precluded from using a service that they are not authorized to use. These could include minors, undocumented immigrants, or people with criminal histories. It also provides a database of information that can prove useful in an investigation by law enforcement in the event of some future criminal activity. KYC is an integral part of many online platforms such gambling and forex trading.

AML stands for “Anti Money Laundering.” AML basically refers to a variety of regulations that are enacted to prevent the generation of income via illegal and illicit transactions. It is incumbent on government and financial institutions to create a regulatory framework that makes it difficult for individuals involved in illegal and illicit activities to convert money obtained under illegal money into legitimate assets. The mainstream financial ecosystem has been developed in such a way that there are numerous checks and balances that help prevent money laundering.

Cryptocurrency Regulation

As stated earlier in this article, KYC and AML rules form a big part of the efforts being made to regulate the cryptocurrency space. With billions of dollars being poured into the market from various sources, government and financial institutions feel the need to closely monitor the space. KYC and AML rules, however, go against one of the biggest foundational philosophies of the blockchain which is the underlying technology behind cryptocurrencies and that philosophy is anonymity. Cryptocurrency transactions ought to be anonymous and untraceable which is a big headache for regulators as there are fears that criminals could take advantage of such a system.

ML/TF is a commonly quoted term by opponents of cryptocurrencies when offering arguments against the system. ML/TF stands for “Money Laundering/Terrorist Funding.” Being unable to track the movement of money could be potentially catastrophic to the financial and territorial security of any country. For this reason, it has become common for governments in some countries to clamp down on the cryptocurrency market. While the approach might differ from country to country, the underlying sentiment is the same; the removal of the cloak of anonymity that surrounds cryptocurrency transaction.

Cryptocurrency Exchanges

The biggest aspect of the crypto commerce market is cryptocurrency exchanges. These platforms facilitate the actual trading in cryptocurrency tokens. The market functions just like the forex market, there are crypto pairs that can be bought and sold with traders making a profit via the fluctuations in the crypto exchange rates. Traders can also hodl if they wish and sell when the price skyrockets.

In order to use cryptocurrency exchange platforms, a person has to sign up for the service on the website of the platform. Once signed up, a person can begin to trade in cryptocurrencies. There are numerous exchange platforms all over the web and they have different incentives to attract customers. In recent times, the government has come hard on crypto exchanges in the area of KYC and AML regulations.

Many cryptocurrency exchange platforms now have strict rules concerning account verification. In times past, an unverified account could still carry out transactions up to a certain upper limit. But nowadays, customers have to verify their accounts before they can even begin to trade on these platforms. Anonymous trading accounts are increasingly being outlawed by many governments. In South Korea, the government has banned all anonymous cryptocurrency trading accounts.

Cryptocurrency trading platforms present a viable opportunity for introducing KYC rules into the cryptocurrency space. There aren’t a lot of entry points for KYC regulatory framework in the overall blockchain and cryptocurrency construct. With AML, it becomes a little trickier. The effectiveness of AML laws depends on service providers being forthcoming with timely information about suspicious activities. Government and financial regulators have been increasing the level of their focus on the activities of crypto exchange platforms. In India, the bank accounts of some major cryptocurrency exchange platforms were frozen on the suspicion of engaging, enabling or failing to report illegal activities.

The Efforts Made So Far

In 2014, Charlie Shrem, one of the most recognizable figures in the blockchain and cryptocurrency space was sent to prison having been found guilty of money laundering conspiracy. Charlie Shrem’s alleged offenses were tied to the notorious Silk Road darknet marketplace. He was accused of aiding Robert Faiella to launder $1 million worth of bitcoin which was then used in the purchase of several illegal and illicit items. Charlie was also accused of failing to report suspicious activities on his cryptocurrency exchange platform, BitInstant. He was sentenced to 2 years in Federal Prison, finally gaining his freedom in June 2016.

South Korea, the United States, the United Kingdom, and the European Union have also made KYC and AML rules an integral part of all cryptocurrency regulatory frameworks. The European Parliament in conjunction with the European Central Bank passed a ruling in 2017 that would introduce robust KYC and AML rules into the crypto market. The ruling is currently being ratified by the various member countries. Countries like France, South Korea, the United States, and even Japan have also made efforts to improve the KYC and AML rules in operation in the crypto markets of their respective countries.

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