Why AML & KYC is crucial for Bitcoin & other cryptocurrency transactions

Anti-Money-Laundering (AML) and Know-Your-Customer (KYC) regulations are financial security protocols in place to prevent fraudulent activity. As money is a limited resource – i.e., there is only a finite amount available, prevention of economic damage, especially through means that make a potential threat harder to track, is absolutely paramount.

 

KYC is the term for the series of due diligence activities performed by regulated financial companies that are designed to check for the relevant information required to safely do business with their clients. At a higher level, KYC also forms part of the banking regulations which govern the financial sector.

 

AML is a much more recent development, introduced during the 1989 G7 Summit in Paris, as response to concerns about criminal activity across borders. In the US, AML automatically applies to transactions over $10,000, which is still comfortably below where the price of BitCoin and Ethereum, the two premier cryptocurrencies, currently sit. Consequently, having a strong AML system in place to prevent exposure to illegal activity – in particular, the use of cryptocurrency to launder money, is extremely important.

 

The presence of these two protocols has both positive and negative effects on investors looking to convert their cryptocurrency into fiat. The obvious negatives are that it creates a barrier to easily withdrawing cryptocurrency and using it to buy goods and services in the real world – arguably the single greatest failure for major cryptocurrencies in this day and age.

 

The positives however, are more considerable. The potential danger of an unregulated global currency should be obvious – one need only look at the corruption of DEA agents in the Ross Ulbricht trial to see that the opportunity to own large amounts of anonymous currency presents a great deal of temptation. Hundreds of millions of dollars of Bitcoin alone have been stolen since 2013, and proper security checks on who is handling what are paramount in today’s global financial climate.

 

What exactly constitutes sufficient AML and KYC checks, however, is open to some debate. AML, arguably the most important of the two protocols, is not globally binding, so BitCoin wallets located in less salubrious nations can be populated by clients who are deliberately seeking to use their cryptocurrency for nefarious purposes. It is not difficult for a simple Google search to bring up lists of wallets that have poor (or almost non-existent) AML protocols in place. While much of this information is designed to help investors know which companies to avoid (for the security of their own currency), it serves equally as a means to identify which wallets may be beneficial to criminals looking to either store their ill-gotten gains, or to exploit the finances of others.

 

Should cryptocurrency grow, especially in light of the BitCoin Cash developments, the need for AML and KYC checks to head off the possibility of using cryptocurrency as a form of tax evasion is clearly going to be necessary.

 

For a wallet (or other cryptocurrency service) looking to prove high quality service to users, it is important to prove to potential investors that the AML and KYC protocols are robust – would you put your money in bank that did not know who was on site at any given time? It is unlikely.

 

IDMERIT’s solutions for Anti-Money Laundering allows businesses to quickly and easily identity high-risk applicants and manage them in an appropriate manner. Our data identifies and focuses on key markets across the world, while staying current on some of the most stringent identity management models. Our document image validation management allows businesses to approve the credibility of more than 520 global record formats, including national ID cards.

 

A financial services provider does not have to be deliberately complicit in order to assist in money laundering, it simply needs to be lax on rules – for whatever reason.

Jay Raol
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