Whats the real reason why crypto is facing so much slack?
If you slightly do your research you will find — It is difficult to have a bank account if you trade in crypto due to money laundering concerns. If you are an exchange then you know how difficult it is to get a bank account. Binance had to switch countries and setup research lab in Malta to figure out compliance.
Central banks in some countries had to even ban the market entirely.
So why the hell we need anti-money laundering regulations?
Let me explain with a “stolen car” example.
Let’s say you bought a car for $10k from someone and you did not know it was stolen. Tomorrow the rightful owner discovers that you have his car. Obviously he is going to take it back, leaving you in a $10k hole. Now you have a right to recover it?
Now, let’s say the bank was in the know and also facilitated the transaction. Then obviously the bank is liable. You can then recover the money from the bank.
But, why do banks have to know what is going on?
Now, here is the real deal.
- Most crimes in the world have a financial motive.
- Criminals protect themselves by escaping jurisdictions
- Large crime syndicates can have power to subvert democracies, form dictatorships and expand international business of crime.
Such criminals can not be dealt with normal human beings or even local police.
The hidden super heroes protecting humanity
You might not have heard of Financial Action Task Force (FATF). It is a group of Central banks representing most countries who make these rules to catch and disable organised crime. This organisation although has no teeth but writes the rules that provide teeth or gathers intelligence for other bodies to effectively prevent, mitigate and disable crime on earth.
The highest level of crime fighting and Decentralised at its core
This organisation basically mandates that all banks must watch transactions that may have reasons to be suspicious. If they find anything wrong then they must report those transactions to their respective countries intelligence units. Otherwise the liability of not following this lands on the bank.
It does not enable any mass surveillance but only reporting of suspicious transactions.
Secondly, it mandates that known international criminals, syndicates and uncooperative jurisdictions should be reported, so that they can be tracked and the network be uncovered.
Three levels of responsibilities on banks
- Know your customer (KYC or CIP) — Identify the customers.
- Customer Due diligence (CDD) — Rule out fake or stolen identity through independent sources and verify against watch lists.
- Enhanced Due Diligence (EDD) — Check if the source of wealth is legal.
It further minimises cost of tracking crime by letting banks decide the level of diligence required except mandating absolute correct identification of individuals and beneficial owners (Level1).
Expanded scope of Anti-money laundering
These structures were put in place to track terrorism and then the scope got expended to include other heinous crimes, drug trafficking and now even bribes taken by people in power.
The dilemma with crypto currencies
By now I hope you realize how critical this is in keeping the world from going insane.
On one side the problem is caused by money being a dual use technology that itself creates incentives for crime. On the other side the potential of smart money that can possibly eliminate such incentives. It has potential to enable tracking accross borders and asset classes on chain pseudo anonymously an make it even more stronger.
However, there is a huge gap in crypto-currencies.
The problem is because all transactions are remote and peer-to-peer.
Problem 1 — currently there exists no way to correctly identify individuals remotely i.e. name, date of birth and current address. Anyone can easily create a fake electronic document or switch any information.
Thus, the law requires that any information be checked by independent source. So, either you check the physical document and its security features. Or do level two due diligence. Use global databases to authenticate the existence of the identity.
Problem 2 — correctly authenticating the person presenting the identity remotely. Any criminal can replace the photograph on a electronic document. Or evade detection on a video interview by untrained staff.
Final problem — it is difficult to expect individuals to carry out checks, unless they are completely automated and reusable.
Basically, we need a global wallet registry that runs all these checks in the background. It protects individuals privacy and automates the KYC+CDD clearance.
Enter cryptographic-KYC — a cryptographic shield for the crime fighting super heroes!
The global financial institutions have no way of checking identity documents. There is an epidemic of fake passports and every possible identity document. Having a global database of identities for verification has its own GDPR issues.
Diro labs was able to invent a new technology that basically gives a user the ability to capture live screen shots from secure websites inside password protected areas. It further proves that the user was able to login to a website at a particular date and time. All of this cryptographically verifiable using SSL certificates from the websites and blockchain that can be then be authenticated by a third person based on simple cryptography.
- A user can login to his utility company and generate an Original document of his residential address proof.
- Login to his bank account and capture is profile or bank statement as an original document with a time stamp. It is able to prove that the remote user is in control of the bank account and the information is real.
- A user can login to any government portal like Aadhar, or US social security and capture his/her identity document to be presented to other third parties remotely.
Global impact and use case
This technology eliminates all fraud documents. Now, it is not required to trust physical documents that have no way of knowing the authenticity unless you are trained to spot them. It also eliminates the need for physical verification.
It solves the problem of millions of fake identity documents that are in circulation today.
Now, one can remotely authenticate real identities on the Internet. It can also identify the real identity owners remotely by having them to validate themselves against multiple websites like banking, utility provider and government.
It saves a ton of money by automating the physical KYC, and customer due diligence for financial institutions. Revenue recovery increases by preventing KYC, due diligence failures during on-boarding. And, most importantly, slashes the global risk and liability for money laundering.
Having a secure cryptographically provable identity that can meet NIST 800–63 standard globally changes the game. It truly decentralizes the global trust in identities and privacy control.
It uses the same cryptography of SSL/TLS that is used today that makes the internet secure and internet banking possible. Balancing Privacy and surveillance in the most user-centric way through real decentralisation.
Why is it a game changer for crypto?
Diro labs is building a global wallet registry that also acts as a shared KYC/CDD utility that the user controls and the banks can trust.
All international laws like FATF, MLD4, JMLG etc mandate financial transactions to have identity proofing and verification through independent sources.
Having NIST800–63 compliant identity proofing and verification on internet is a game changer for the Fintech world.
Having cryptographic verification of documents restores trust between banks and blockchain transactions. A global wallet registry turns the dual use technology once tightly controlled by governments, and used in wars, into a global crime fighting machine.
A reusable identity clearinghouse solves the user experience and liquidity issues that the current ICOs and exchanges are facing. It provides a bridge between governments and the crypto world in an effort to make a better world.
Further use cases
Having a global legally valid and cryptographically verifiable identity on the internet solves a lot of accountability issues like fake news, fake influencers and potentially even hacking.
Having cryptographically verifiable documents with provenance changes the paradigm of notary, apostille and trust in general. Ability to mathematically prove documents and sources behind private logins to third parties has direct impact on global commerce.
- a ship verifying a Letter of credit document if it is coming from a bank or tampered.
- applying for visa or passport all remotely.
- Verify beneficial ownership or company information that is not in public domain.
- Verify property documents or availability of funds in a bank account remotely and without intermediaries.
- Legally verify clients and vendors of Uber & Airbnb remotely and instantly.
Decentralised Trust will be the corner stone of peer-to-peer shared economies of the future.