Cryptocurrencies have become one of the most talked about subjects in the financial sector. But in spite of their advantages and revolutionary innovations, it does not come without its criminals and illicit activities. Since the beginning of 2017, governments from all across the world have been drawing up regulation for this market sector. The majority of these efforts have been revolving around the implementation of KYC and AML regulations.
What are KYC and AML?
KYC is the abbreviation for “Know Your Customer.” The process involves getting relevant information regarding the identity of the customers of a service. The platform that offers the service will require all customers to submit appropriate identification documents such as photo IDs, bank accounts, credit card information, residential address, bills, invoices, etc.
KYC is mainly used to ensure that only qualified people have access to use a certain service. This is done so that minors, undocumented immigrants, or people with criminal histories are prevented from using the service.
It also creates a database of information which law enforcement can use in their investigations in the case of some future criminal activity. KYC is an essential part which is integrated into many online platforms, like those used for gambling and forex trading.
AML comes from “Anti Money Laundering.” AML consists of a variety of regulations which are implemented in order to prevent income being generated through illegal and illicit transactions. It is obligatory for government and financial institutions to develop a regulatory framework which hinders criminals from converting money resulted from illegal operations into legitimate assets. The mainstream financial ecosystem features numerous checks and balances that are designed to prevent money laundering.
KYC and AML make up a big part of the efforts used in the regulation process of the cryptocurrency industry. With billions of dollars entering the market from various sources, government and financial institutions feel compelled to monitor the space more closely.
As ICOs have increased both in popularity and number, regulators have also been paying more attention to them. Now there is a certain level of KYC and AML required for all coin offerings.
KYC and AML regulations, however, are in contradiction with the core philosophies on which blockchain- the underlying technology of cryptocurrencies- was built on; that philosophy being anonymity. By this principle, cryptocurrency transactions should be anonymous and untraceable which causes a lot of issues for regulators as there are worries that criminals could take advantages of their system.
ML/TF is a commonly used term by cryptocurrency opponents when presenting arguments against the system. ML/TF comes from “Money Laundering/Terrorist Funding.” If money transfers cannot be traced, this could be potentially disastrous to the financial and national security of any country. Because of this, it has become common for governments in certain countries to start cracking down on the cryptocurrency market. While this approach is different for each country, the basic idea is the same: to strip crypto transactions from their anonymity.
The Implementations Made by Now
In 2014, Charlie Shrem, a prominent name in the blockchain and cryptocurrency industry received a two- year prison sentence for being involved in money laundering and tax evasion schemes. Charlie Shrem’s alleged wrongdoings were in connection to the notorious Silk Road darknet marketplace. The accusation was that he helped Robert Faiella to launder $1 million worth of Bitcoin which was subsequently used to acquire several illegal and illicit articles. Shrem was also indicted for not reporting suspicious activities which took place on his cryptocurrency exchange platform, BitInstant.
South Korea, the United States, the United Kingdom, and the European Union have also integrated KYC and AML procedures in all of their cryptocurrency regulatory systems. The European Parliament together with the European Central Bank decided in 2017 that sturdy KYC and AML rules have to be introduced into the crypto market. The ruling is presently being approved by the various member nations. Countries including France, South Korea, the United States, and even Japan have all implemented enhancements to the KYC and AML procedures in effect in the crypto markets of their respective nations.
As more and more countries are starting to implement a regulatory framework for cryptocurrency exchanges, wallet services, and other blockchain businesses, they will all have to comply to the KYC and AML standards if they want to operate legally.