Rise of Regulations: The What & Why of KYC-AML for Token Projects & Their Contributors
The rise of regulation is here.
And this regulation isn’t just impacting ICOs, every token generation event including airdrops and private pools are being scrutinized by banks and regulators. Banks have to protect their money and are many are now requiring thorough KYC-AML. We’re sorry to burst any bubbles, sending a selfie with their ID via Telegram message is no longer adequate either.
Token projects and their contributors have to get serious about KYC-AML and we’re hoping to clarify some misconceptions while providing valuable insights into the latest regulations around KYC for ICOs and other token generation events.
What is KYC?
You may already know this, but “KYC” stands for “Know Your Customer” which comes from the traditional investment world where investors and banks want to know “detailed information about their clients’ risk tolerance, investment knowledge, and financial position”.
In the US, KYC was initially enacted as part of the Patriot Act and is especially highlighted in Title 3 in that financial institutions must comply with stricter KYC in the form of the Customer Identification Program (CIP) and Customer Due Diligence. The latest in KYC comes from a July 2012 laws: Financial Industry Regulatory Authority (FINRA) Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability).
It’s part of the reason that US residents can’t contribute to ICOs and other token generation events because the US requires them to be “accredited investors” where they either earn over $200,000 in each of the prior two years and reasonably expects to earn the same or have a net worth over $1 million. If you’re a token project who has taken funds from unaccredited investors, the SEC could be knocking on your theoretical door any second.
Outside of the US, KYC really started impacting cryptocurrency projects in December 2017, and for good cause, as the UK alone has seen 10x as many KYC/AML fines in 2017 than 2016.
The most important thing to do know about KYC is that there is no standard process for what a bank (if you’re a token project) or what a certain project (if you’re a contributor) will require when it comes to KYC.
What is AML?
“AML” stands for “Anti-Money Laundering” and, like KYC, is meant to prevent faulty financial deals and investments.
The Financial Crimes Enforcement Network (FinCEN), a U.S. agency, has said that all token projects are “liable to register as a money transmitter and comply with the relevant statutes around anti-money laundering and know-your-customer (KYC) rules.” FinCen works closely with the SEC and the CFTC to clarify and enforce the AML/CFT obligations of businesses engaged in ICOs activities that implicate the regulatory authorities of these agencies.
The SEC is known to flex their muscles when it comes to AML, which is why token projects should be cautious. Even the Trump Taj Mahal Casino Resort was fined $10m for “significant and long-standing anti-money laundering violations” and Caesars Palace was fined $8m for “lax anti-money laundering control on high rollers.”
Again, while KYC and AML are generally thought of as US laws, all cryptocurrency projects and their contributors are now being reigned in under global KYC-AML rules and regulations.
KYC-AML For Token Projects & Their Contributors
At this point, we hope it’s pretty obvious that ICOs and token projects need to be running KYC/AML against every single one of their contributors — whether you’re doing a private pool, airdrop, or an ICO. We also hope that token project contributors realize that they shouldn’t be participating in an event that isn’t doing KYC-AML checks.
But, what does the KYC-AML process actually look like for token projects?
While the talk around the importance of KYC-AML sounds scary and intense, the actual process is quite easy for projects and their contributors.
Usually it starts with a conversation between the project and their legal team on exactly what information they need to collect for KYC/AML. This usually includes full name, date of birth, home address with proof, and contact information — which, for crypto projects, is usually email and phone number.
But, they might also say your project should ask for occupation, sources of income, references, and more. Make sure your legal team is aware of the latest rules and regulations on where you’ll be withdrawing the funds you raise to create your project.
Then you find your KYC provider. There are several large KYC/AML companies out there (a google search will find them) but, as cryptocurrency is very new and the rules and regulations are changing so often, we highly recommend finding a partner who specializes in KYC for ICOs and token projects.
Depending on the solution, you can either:
- Bake KYC into your ICO or other token generation event’s signup process on your own platform
- Have the KYC process be completely separate and email all users — definitely not ideal but what major firms will request and many projects who didn’t do KYC at first are now finding this their only option or
- Use a platform like WeStart where you can both launch your ICO, airdrop, or private pool and run automatic KYC against all of your users
Your KYC/AML runs simultaneously as you get signups for your project — so it’s not like you have to wait until the end to then go register all of your users meaning it doesn’t cost a lot of time to do it. Speaking of cost, KYC/AML has become so efficient that you shouldn’t be paying more than a few dollars per verification.
Most of this runs behind the scenes without token projects having to do anything themselves. A little bit of work on the front end by ensuring that all contributors are following the flow to properly register under KYC-AML rules and regulations and you’ll save a ton of headaches and possibly losing all your funds in the long-run.
KYC-AML for Projects & Contributors is Crucial
If you’re a token project and thinking about NOT doing KYC/AML for your project…please go back to the beginning of this article and reread it. We can’t harp on how many crackdowns are coming to cryptocurrency as the wild wild west we knew and love is going away as the sheriff comes to town.
If you’re interested in using WeStart to run your KYC-AML or are a token project contributor looking for a variety of new projects, visit WeStart today.
