Security Token Trading Platforms Poised to Stymie Money Laundering
Crypto exchanges have gained a bad reputation as being safe havens for money launderers to escape regulatory scrutiny and the law. This negative perception has not helped institutional investors or the mainstream in gaining the confidence necessary to participate in the burgeoning token economy. Security token trading platforms are poised to, not just change the perception of the digital asset investing space as a whole, but to put a halt to money laundering through compliance with regulations such as AML and KYC processes that prevent money launderers from obscuring their identities.
The Wall Street Journal recently performed an investigation that revealed nearly $88.6 million was laundered through 46 crypto exchanges over the past two years. Essentially criminals used exchanges like ShapeShift to convert bitcoin into Monero, which is untraceable. Though transactions can be tracked on pseudonymous blockchain ledgers like Bitcoin, any trail is lost once converted to Monero. This cryptocurrency can then be exchanged back into bitcoin, ether, or simply cashed out into fiat currency. In response to these discoveries, ShapeShift plans to implement a user identification protocol in order to achieve compliance required by the SEC.
The SEC’s recent actions against Zachary Coburn, founder of EtherDelta, for operating as an unregistered national securities exchange is yet another reminder of the inevitability of regulation. Though many in the crypto sphere decry regulation as a hindrance to growth, we’ve seen how a “move fast and break things” mentality has led to a highly unbalanced digital ecosystem wherein people are the products and advertisers are the consumers; repeating the same error of attempting to implement latent corrections in the token ecosystem would not be ideal. The reality is in order for the token economy to become a reality among the mainstream, regulation is necessary for maintaining a secure and compliant environment.
The security token arose from the need to render the token economy compliant with SEC regulations but was also driven by a growing interest in alternative assets because of the streamlined and automated trading enabled by blockchain technology. Alternative assets are assets that have historically been difficult to trade because they are non-fungible (cannot be split) or have a relatively small pool of buyers. Rare art is an example of an alternative asset, as art would lose its value if it was physically split into pieces owned by different individuals; however, the tokenization of assets enables fractional ownership of such works of art for the first time in history.
OpenFinance Network (OFN) is a regulated alternative asset secondary market trading platform that streamlines the trading process using the automation enabled by smart contracts, a blockchain application. Current alternative asset trading systems can involve so many intermediaries that a trade can take up to 6 weeks to complete. By employing blockchain technology to automate many of the functions normally performed by third party middlemen, OFN aims to cut that time down to several minutes. By cutting down the time it takes to make a trade, OFN is helping to create more liquid markets for normally difficult to exchange assets.
ShapeShift did not intend for its platform to become a haven for money laundering, but unfortunately the lack of ID authentication combined with the capability enabled by the platform to convert more trackable coins into untraceable ones created the perfect environment for it. Regulation is intended to protect the majority of users from a small minority of those who would seek to exploit systems for their own gain, often to the detriment of others. The Food and Drug Administration (FDA), for example, sets guidelines for what types of foodstuffs and drugs are safe for consumption. Without such regulation, we could have an epidemic of cheap-to-make, but dangerous-to-health products like what occurred in China in 2004; at least 50 babies died after being fed a milk formula that only contained 6% of the nutrients needed for a growing infant. Similarly, the Environmental Protection Agency (EPA) is supposed to protect public resources such as safe drinking water. Financial protections are just as important; without them, investors are vulnerable to scams and criminals profit from lack of oversight without consequences that would deter such negative behaviors. OFN supports clear and equitable regulations and believes that compliance will ultimately lead to the maturation of the entire token economy.
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Juan M. Hernandez is the Founder and CEO of OpenFinance Network, the trading platform for security tokens and other alternative assets. Juan is a serial entrepreneur, technologist, and polymath experienced in financial markets, exchanges, and blockchain technology. He holds a CS degree from Northwestern University and an MBA from the Kellogg Graduate School of Management.
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