KYC/AML As New Regulatory Standards in ICOs

Know-your-customer (KYC) and anti-money-laundering (AML) can become new regulatory standards for token distribution in ICOs. Why are they important? Let’s get into the details.

What Are KYC and AML?

KYC relates to due diligence activities performed by a financial institution or regulated company on their customers’ identities. KYC is extremely important when it comes to customer integrity and probity. To facilitate KYC, financial institutions and regulated companies need to monitor any violations of their customers’ transactions.

KYC includes:

• Basic identity information, which is called the Customer Identification Program (CIP) in the US
• Checkup against the existing blacklists
• Risk evaluation in terms of fulfilling the commitments
• Monitoring of previous transactions

It’s important to know that KYC regulations can differ from country to country. For the differences, head over to the KYCMap.

AML is a set of actions designed to prevent illegal profit-making. To detect laundering techniques, countries are advised to follow the Financial Action Task Force on Money Laundering (FATF) recommendations. In terms of KYC, financial institutions and regulated companies are required to implement the local FATF procedures. Just like KYC ones, AML regulations can differ from one jurisdiction to another.

Why Do ICOs Need KYC/AML?

There are a lot of disputes on whether ICOs need KYC/AML checks.

Some say that there’s no need in KYC/AML because state authorities could never identify the token holders. Why so?

All tokens are encrypted. To decrypt them, their owner needs to apply a private key. It means that since private keys are only accessible to their owners, nobody else can get to know who the token holder is.

However, those supporting KYC/AML blockchains use the example of such countries as China, South Korea, India, and the USA, which regulate token distribution. In these cases, KYC/AML can eliminate the risk that a particular ICO will be considered illegal since it doesn’t satisfy all the legislative requirements.

To date, some startups and ICO marketplaces have already started requiring KYC/AML from their investors. It’s made to prevent any prosecutions which can be associated with ICO investments in the future. Among such platforms requiring investor accreditation, there is genEOS. All the investors participating in the crowdsale must follow the KYC/AML rule to claim their genEOS tokens.

How to Improve KYC/AML Using Blockchain?

To enhance KYC/AML, it’s possible to build these practices into a blockchain. Acting as a digital ledger, blockchain can guarantee data transparency and integrity. In addition, blockchain’s inherent decentralization prevents data from being hacked or otherwise forged.

If KYC/AML processes are built into a blockchain and enabled through smart contracts, the potential investors’ identities will be verified automatically. ICOs will sell tokens only if these investors satisfy all the requirements.

Summary

To date, KYC/AML is not yet an obligatory requirement for ICOs. However, since the blockchain industry is still developing and new regulations are constantly popping up, it is possible that KYC/AML will be required in the future.

To protect their investors from such possible changes, some startups have already started implementing this requirement for their token holders.