Regulators worldwide are passing tougher restrictions on cryptocurrency exchanges, initial exchange offerings (IEOs), and other ways of fundraising and trading digital funds. They’re also easily announced than implemented. Blockchain companies have argued that rules aimed at digital currencies are often counterproductive when it comes to regulating assets designed to bypass third parties. —
Nonetheless, government actions are creating more demand for regtech firms.
“Enterprises are relying on regtech for easy and affordable compliance in a maturing crypto industry,” says Stephen Hyduchak, CEO of Aver, a tech firm that verifies user identities via facial recognition and augmented-intelligence (IA) technologies. “Stricter electronic know-your-customer (eKYC), enhanced due diligence (EDD), and age-verification will tend to increase compliance costs. It’s important for the ecosystem to access compliance tools at scalable cost so their enterprises can continue to grow.”
FATF’s Travel Rule and Crypto Exchanges
The Financial Action Task Force (FATF), an intergovernmental organization that fights money laundering passed new rules in June 2019 that requires virtual asset service providers (VASPs) to collect significantly more information about senders and receivers (of cryptocurrencies), as well as to share such information with other VASPs.
Crypto exchanges must gather and share originator name and account number (e.g. wallet info), location, as well as beneficiary name and account number in what is being called the “travel rule.” Individual wallets being used as a business may be subject to licensing requirements.
FATF rules are not binding, but 37 member countries are influenced to adopt its guidelines or risk being blacklisted.
Privacy advocates aren’t too happy. VASPs sharing sensitive info (such as identities, geo-location, and wallet addresses) they argue is a recipe for data breaches and stolen bitcoins. Secondly, the Wild West of cryptos are a libertarian-leaning crowd who likes financial anonymity. Many are skeptical (indeed, cynical) when bureaucrats justify new regulations as curbing money laundering and terrorism -- when cumbersome rules simply discourage blockchain ventures from disrupting traditional banks, which have entrenched political allies.
“The way governments frame this debate is important, because nobody could possibly be against a law that would fight terrorists ...,” writes Dean Steinbeck, a U.S.-based attorney who specializes in cryptocurrencies. “But [people] shouldn’t be fooled. This is not about money laundering or terrorism. It’s about personal freedom.”
G20 nations are expected to follow FATF’s new guidelines for VASPs.
Crypto Exchanges: eKYC and Enhanced Due Diligence
Tougher rules mean companies must implement practices for eKYC (the online verification of user identities) and enhanced due diligence (EDD). The right solutions make it easier for enterprises and customers to comply, especially on mobile devices. For faster and accurate processing, more crypto entities are using biometric data such as facial recognition to authenticate users.
The economics of compliance is also important.
Regtech firm Aver allows crypto exchanges that are affected by the travel rule to conduct recurring ID checks at a fraction of the cost. The North Carolina-based firm’s verification process can detect forgeries and alterations on submitted documentation in over 190 countries.
Moreover, the Aver platform can detect geo-location, as well as anonymity tools like virtual private networks (VPNs) and Tor browser. Bad actors often use aliases. Aver leverages facial-recognition tech that compares submitted IDs with government and public images. And it can catch invalid live selfies that attempt to spoof checks.
With assistance from augmented intelligence (IA), most checks are completed in 60 seconds or less. The Aver platform can be used in risky sectors such as cannabis, tobacco, payments, and bank services. Thus, enterprises and customers can comply with AML, KYC, GDPR, and PSD2.
Affordable and convenient compliance is what the ecosystem needs in light of a tougher regulatory environment. The alternatives would be to skirt the rules and risk penalties, move to a safe haven, or shut down altogether.
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