A&M's Peter Kwan shares his perspective on the Crypto-AML dilemma and presents some key innovations for cryptocurrency adoption:
There is a sentiment amongst the Cryptocurrency community that Know-Your-Customer and related Anti-Money Laundering regulations serve no other purpose than to place unnecessary red tape on innovation. However, it is important to remember the cautionary tales related to Cryptocurrencies – namely the billions of dollars that have been lost through ICO frauds, black markets that have prospered in the absence of regulatory controls (e.g. Silk Road, AlphaBay, Agora, OpenBazaar) and the laundering made easy by exchanges that aid in the mixing/tumbling of hundreds of crypto assets. And of course, let’s not forget about all those hopeful cryptocurrency asset holders that have also been taken along for a backseat ride.
Some argue that our current Crypto-AML dilemma was born out of sheer technological innovation driven by free market ideals or global financial institution de-risking policies inadvertently shutting out growing underserved or underbanked communities of the world – my best guess is that it’s likely a combination of the two. While it is true that Blockchain-based ecosystems offer unparalleled transparency on the transacting of cryptocurrencies, it simultaneously creates a deeper vacuum around the people / entities who are directing the activity. As with any new technology, balance is key. The following innovations will play a pivotal role in ensuring that cryptocurrencies can mature to their full potential:
- Financial information sharing partnerships will become critically important from a KYC / AML perspective in dealing with cross-jurisdictional bad actors (e.g. FFIS & JMLIT in the UK, 314(a) in the U.S., FMLIT in Hong Kong, ACIP in Singapore, etc.)
- Cryptocurrency exchanges will need to embrace a culture of awareness (and eventually compliance)
- Regulators need to continue to invest in educating themselves on innovation
- Law enforcement will need some way to make sense of all the cryptic addresses that may come up from impending suspicious activity reports
- Global lawmakers need to align themselves with around a common treatment of cryptocurrencies
- FinTech / RegTech luminaries need to seek opportunities to create "protocol-level," decentralized solutions to better secure, standardize, transmit and share (with authorized users) KYC/AML information.
In closing, it is best to remember that innovation comes with a price. As much as there is a responsibility on the regulatory community to embrace and understand new technologies – there is an equivalent responsibility on innovators to at least consider how their technologies can be used in nefarious ways. If history has taught us anything on this topic, we should not cast away our better instincts in pursuit of shinier, newer toys.
KYC practices are fast becoming the gold standard for regulatory bodies looking to thwart money laundering in the cryptocurrency ecosystem. It's incumbent upon the cryptocurrency ecosystem to develop solutions that carry out these practices in a manner that doesn't kill the technology's promise.