KYC and AML in the crypto industry: a leap forward, or a step behind?
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Know Your Customer (KYC) and Anti-Money Laundering (AML) policies have made the financial system what it is today, yet many are unaware that they even exist. You may be asking yourself, what is KYC? Or what is AML compliance? The reason these policies are not widely known is likely due to the fact that they were instituted so long ago.
In 1970, Congress passed the Currency and Foreign Transactions Reporting Act, also known as the Bank Secrecy Act (BSA), the first step toward modern-day Know Your Customer and Anti-Money Laundering policies. It requires banks and other institutions to collect and keep records of their customers’ identities and addresses, in order to prevent money laundering, and to easily identify customers who may be participating in illegal activities.
Due to the BSA, financial institutions are required to have at the minimum a customer’s name, date of birth, residential or business address, and their identification number. The United States government requires financial institutions to collect and store this information; despite the security measures they have in place to protect it. This information generally isn’t stored in an encrypted way, leaving it exposed for any hacker who happens to break through an institution’s security.
Can KYC and AML reinvigorate the cryptocurrency market?
A significant reason cryptocurrencies have not been adopted on a wide scale is related to the number of scams and fraud that have run rampant in the industry since its inception in 2008. Many cryptocurrency organizations have begun adopting KYC and AML policies in an attempt to curb cryptocurrency use in illegal activities. However, cryptos like Monero, which were originally developed with anonymity in mind, make instituting KYC/AML much more difficult.
In these cases, self-regulation is the solution some exchanges are going for. For instance, in June 2018 Japanese crypto exchange Coincheck removed the option to use Monero, Zcash, Dash, and Augur’s Reputation in order to adhere to Japan’s Financial Services Agency policy concerning cryptocurrencies that provide complete anonymity.
Self-regulation is becoming the new norm in the crypto industry, as it is much easier to find solutions within the cryptocurrency community rather than relying on global regulations, which tend to lag behind the newest developments in cryptocurrency. KYC/AML instituted through self-regulation in the cryptocurrency community may increase security and therefore attract more investors in the process.
Attract investors? Or increase innovation?
KYC/AML at the moment acts as a double-edged sword. Their implementation has the ability to attract investors who are sceptical of the security in the crypto industry. However, they also can limit innovation altogether by restricting licensing to companies which cannot afford the cost of KYC/AML upkeep.
There are aspects of KYC/AML that are severely flawed, but ultimately the real flaw lies in security. It isn’t the necessity of collecting customer information that is flawed, but the systems that are in place to keep that information safe.