• 06 April 2021
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Why every ICO should comply with KYC and AML regulations

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In the crypto realm, one of the most controversial aspects that’s constantly being discussed is KYC (Know-Your-Customer). KYC verification is becoming an increasingly important part of many Initial Coin Offerings, with the overall number of such projects requiring it increasing by the day. Because of this, it’s crucial that there’s a deep understanding of process and procedure. Below, we’ve outlined some of the more specific aspects of KYC regulations to help you get a little insight.

In short, KYC refers to the process of identity verification of a customer. In terms of an Initial Coin Offering, each and every backer of a project should pass the KYC process by providing their information before they can participate. This sharing of credentials is important in ensuring that ICO’s are dealing with legitimate individuals and business entities.

How does the KYC process work?

The Know-Your-Customer procedure is fairly straightforward. Firstly, the backer in question needs to provide a copy of their ID, usually a passport or a driver’s license. This needs to be provided in the form of a photograph of themselves holding the ID in question. In some cases, further proof of identification is required, such as a proof of address/residency.

When it comes to AML (anti-money laundering) regulations, things are a little broader need some deeper understanding. AML generally applies to a broad set of regulations, policies and laws that are designed to combat income fraud. A specific example might be helpful in understanding things more clearly. Picture an ICO project which employs a stringent KYC procedure in its token-generation stages. This is evidence of legitimacy. This will demonstrate to financial entities like banks that a project is falling well within AML regulation.

It’s worth remembering that AML and KYC regulations differ from territory to territory, making things more complicated when taken in a global context. Because of strict local laws, users from places like India and China are forbidden from participating in ICOs. In other countries like the USA, a more complex set of regulations are in place. More recently, the US Securities and Exchange Commission (SEC) has made it known that it intends to pursue prosecution of ICOs that have been undertaken without implementing correct KYC processes.

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© Courtesy of trulioo.com

The key benefits of KYC

While first impressions might seem to indicate that KYC procedures are counterproductive, things aren’t as black and white as this assumption. It can’t be argued that the provision of identification material goes against anonymity, one of the main selling points of the cyrpto realm, but KYC does encourage a more transparent environment for transactions. This latter point is perhaps the most important and helps ensure that the sales of tokens are handled legitimately.

Main advantages of KYC:

  • prevents the participation of scammers in ICOs
  • fights criminal activity like money laundering
  • helps keep the assets of investors safe and secure
  • helps overcome tax and legal issues
  • encourages credibility with banks and financial institutions

Keeping in line with KYC and AML compliance is important and should not be overlooked. Those looking to participate in ICOs should certainly be weary of where they invest and what tools are laid out to ensure compliance is maintained and monitored. Things to look out for include whether or not platform dashboards feature KYC compliance modules. This ensures that information is collected that provides clients with access to said information, allowing them to review this before deciding on whether to allow acceptance of the purchase of tokens, or refuse the request based on issues with legal compliance.

Common KYC issues to look out for

In almost every case ICO backers will want to ensure that their information is handled with the utmost privacy and that any documents delivered will not be visible to anyone. Because of this, even the most basic of KYC steps are seen as an infringement of their privacy and a barrier to participation. It’s not for the simple fact of supplying this information either, but additionally to do with concerns that any information submitted may then fall into the wrong hands should a data leak occur. As much as backers may want their personal data to be protected, the fact remains that the online world is nowhere near as safe as we would like it.

It’s worth keeping in mind that KYC steps can be implemented at various stages:

  • Most commonly, KYC can occur prior to purchasing of tokens.
  • In rarer instances, KYC can occur prior to registration.
  • Sometimes, KYC procedure can be implemented prior to the output of tokens, although the process can vary wildly depending on the project.

In order to pass the KYC procedure with flying colours, it’s crucial that careful study of AML and KYC regulation is observed. More importantly, this review needs to be carried out with specific relation to the ICO project in hand.

In summary

KYC procedure is of paramount important when it comes to ensuring that ICOs don’t fall foul of scammers and adhere to anti-money laundering regulation. In complying with KYC and AML regulation, the risk of losing assets to criminal activity is minimised, while the overall safety of any tokens sold is maintained. In short, it’s a must for any ICO project that wishes to run an operation in a transparent manner, maintaining a high level of a trust in an often volatile environment.