Anti-criminal Blockchain
By: Maciej Marut, Bartosz Dluzen, Krzysztof Bury
There is no doubt that cryptocurrency industry gain mainstream public attention recently. The group of enthusiasts is almost equal to the group of skeptics. Unstable, speculative cryptocurrencies value spikes fuel the flame between them even more. It is quite confusing though when you turn towards reactions from government entities and the largest financial institutions. From one side, they seem to have a strict condemnation of cryptocurrency concept, while from the other, they seem to see a big potential in blockchain technology, which is the foundation of cryptocurrencies system.
What might be a potential reason for this? Since blockchain cannot actually exists without cryptocurrency and cryptocurrency cannot exist without blockchain, can the banking giants treat cryptocurrencies seriously, considering its rather poor reputation of being a favourite tool in hackers and terrorists hands due to its anonymous nature? Is it really anonymous?
AML and KYC as the Law
One of the main obligation of the large financial institution is the AML (Anti-Money Laundry) regulation and a need of having the KYC (Know Your Customer) process in place. It aims for identifying and verifying the identity of its clients. Whether they like it or not. This prevents them from any criminal financial dealings of their customers and possible fines. If you’re a US financial institution — it’s not just a financial risk; it’s the Law.
KYC process activities typically consists of the following:
- Customer Acceptance Policy (CAP) and Customer Identification Procedure (CIP) — any new investor’s account may be opened only after ensuring that pre-account opening KYC documentation and procedures are conducted. Only those clients, whose identity is established by conducting due diligence appropriate to the risk profile, name matched against lists of known parties such as “politically exposed person” (PEP), are accepted.
- Monitoring of Transactions — identifying customer’s transactions to detect whether they fall outside the regular pattern of activity and appear to be suspicious from an AML perspective.
- Risk Management
It’s all designed to limit money laundering, terrorism funding, corruption and other illegal activities. Unfortunately, maintaining AML processes are also incredibly expensive for companies and the checks required are often lengthy (Know Your Customer requests can often take up to fifty days to complete to a satisfactory level)
Coming back to blockchain technology, the main question is — can you really Know Your Customer when all deals are done in blockchain system using cryptocurrency? Are all the above KYC practices possible in blockchain? And most of all — can blockchain reduce cost and complexity of KYC processes implementation?
Blockchain enhancement for AML
Actually, blockchain seems to be a potential revolution in this space in terms of improvement for AML processes. All of the above regulation policies can easily exist in the cryptocurrency system. It’s just a matter of adjusting few crucial elements.
First of all, blockchain is an online public and distributed ledger, where each transaction is supervised, validated and recorded as a complete transaction history. Public ledger viewers and crypto miners are immediately notified of any transfer from one holder to another. As a result, all blockchain transactions could be easily monitored by anyone.
How about the anonymity of the blockchain transactions?
In general, the money transfer between accounts happens through digital wallets. The “money” is represented by tokens which are stored in electronic wallets instead of bank accounts. Only the wallet-owner has access to his wallet. The owner can send and accept tokens from one wallet to another by providing the identification code of his wallet to the other side of the transaction. The code itself acts as a key, eliminating the need for names or other types of identification. This way, the transaction itself is seemingly anonymous. However, it could be possible to set the global standards for e-wallets and a global regulation of undergoing the KYC identification processes before the new digital wallet is opened. As a result, the anonymity could be reduced and any token transfer between wallets outside of the global standards could be prohibited.
Furthermore, unlike the traditional currency, cryptocurrencies are almost impossible to falsify as the network is built to reject any attempts to try to cheat the system by sending out a falsified chain. Without verification of all transaction phases, the transaction is blocked immediately without any human supervision. In this sense, the digital trail could better serve AML regulations than the existing traditional money transfer.
Risks
The main risk which requires to be minimized in the blockchain system are transaction methods increasing privacy where the deal can no longer be associated with a single wallet. It is possible when practicing a CoinJoin method for bitcoin. It is based on the following idea: “When you want to make a payment, find someone else who also wants to make a payment and make a joint payment together”.
There are several implementations of anonymous bitcoin transactions inspired by CoinJoin: SharedCoins, Dark Wallet, CoinShuffle, PrivateSend feature of Dash and JoinMarket.
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