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Complications of Compliance 05 Sep 2018

Complications of Compliance

Complications of Compliance: Why Crypto Companies Struggle with KYC and AML

First words:

Companies operating within the blockchain space face many similar problems to that present at the Wild West frontier that it is so often compared to; a lack of clear and consistently enforceable laws, unscrupulous actors causing problems, and an ongoingstruggle to legitimise their own company and the space overall. Essentially, companies in the space struggle constantly to fight against malicious actors whilst lawfully navigating an uncertain regulatory environment.

However, even in jurisdictions with clear legal guidelines on matters such as KYC and AML companies rarely take the necessary measures to fully comply therefore unnecessarily expose themselves to the risk of legal backlash. In this ever-evolving industry, even companies who specialise in blockchain-based KYC and AML services more often than not fail to provide a legally adequate service. This article intends to provide some clarification on the matter, by exploring what KYC verifications actually consist of, and the complications of offering a truly compliant AML (or any other verification) mechanism.

 

Differences between KYC and KYC:

Anybody involved in the blockchain space will be familiar with the term ‘KYC’, or Know Your Customer, but most would draw a blank if asked to define the term beyond ‘a type of identity verification’. This is because the term is deceptively complicated, resulting in a huge sweeping misunderstanding regarding KYC; there are actually two entirely different forms of KYC, each of which are suitable (and unsuitable) for different purposes.

The first form of KYC entails comprehensive verification that confirms that a specific identifying attribute (for example address, password or fingerprint) belongs to a specific person, thus conclusively verifying the person’s identity in the process. The second form of KYC is merely a processfor confirming that a user is that specific person who has previously completed the aforementioned comprehensive verification.

This second form of KYC has many advantageous uses- such as internal use for a company wishing to efficiently confirm the identity of a previously comprehensively verified user- but does not satisfy the purposes of identity verification of a brand-new customer, if attempting to be legally compliant in many jurisdictions.

Companies selling this form of verification as ‘KYC’ are misleading and potentially causing crippling future problems for their clients who unknowingly require a comprehensive KYC solution; in such cases a genuine attempt has been made by a company to act in compliance with regulations, but regardless, in many jurisdictions these actors still run the risk of operational or legal backlash- even if they genuinely believed themselves compliant.

This is often not due to intentional malpractice on the part of the verification service provider, but more commonly the result of the complications and regulatory uncertainty of the global blockchain industry itself; the complexity of effectively conducting advanced verifications combined with the uncertainty of the blockchain space means that the services offered by many providers are legally inadequate on at least one front. More astonishingly still, these companies often routinely also offer AML and other advanced verifications, which carry even more complications in terms of achieving regulatory compliance than that of KYC checks. Regardless of this problematic industry situation, such unseasoned companies routinely continue to offer (knowingly or unknowingly) insufficient, and therefore non-compliant, services to their unwitting clients.

The problem is also compounded by the variations in legislation between different countries.
The KYC service provider must be well aware of local legislation in practice for all countries where the service is provided.
There are differences in legislation among others in the following paragraphs: 1. To whom the KYC must be performed. 2. When the sum is exceeded, the KYC or AML must be performed. 3. How to perform KYC or AML.

A lack of clear regulatory guidance and a struggle for compliance are inherent teething problems to be expected from any newly emerging industry, but nevertheless in this ruthlessly rule-obsessed world it is crucial for blockchain-based companies, especially, to ensure complete regulatory compliance in order to avoid operational hindrances or legal backlash. Being confidently compliant can be the matter of employing the services of an experienced and professional verification company who truly understand the ins and outs of both the blockchain and investigation industries, and can be the difference between a solidly successful business and an unknowingly unlawful operation.

 

Summary:


In summary, I could say that in order to promote the industry as efficiently as possible, it would be worthwhile for verification companies to combine their expertise. When you combine together a company that has a great software for fingerprint recognition or image recognition software with image manipulation detection with a company that has worked for years in an traditional authentication business and who knows the legislation as a whole, comes together the service provider who can serve the whole industry.


 

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