Bruce Silcoff is the CEO of Shyft in Toronto, which is focused on developing blockchain-based solutions for digital identity and KYC/AML processes.
It’s easy to question the need for strict know-your-customer (KYC) and anti-money-laundering (AML) controls, as Edan Yago did in a recent CoinDesk op-ed.
Who likes the rising complexity and costs of compliance? Who gets excited about relinquishing control of personal data to set up a wallet, let alone access basic financial services?
The resulting data duplication across multiple centralized, siloed databases raises the risk profile for organizations large and small, stifling basic operations and thrilling and delighting no one.
KYC/AML is an easy target for critics like Yago, who also argue that these practices effectively amount to global surveillance, and therefore stand in direct contradiction to two of the most important aspects of cryptocurrency – privacy and disintermediation. Not only can KYC/AML infringe on a user’s right to privacy, we are told, but it can see sweeping “Big Brother” surveillance practices instituted. Over and out.
Should we do away with regulation then? Down with KYC/AML? Not so fast.
We’ve seen the alternative to no regulation firsthand, and what that means for blockchain companies. Silk Road aftershocks slowed down innovation and effectively de-legitimized the space for years, because blockchain came to be associated with criminal activity. Regulatory uncertainty meant that for years, early adopters took enormous personal and financial risks to pave the roads we get to travel on today.
Even more importantly, if none of us show up to sit at the table when it matters most – when the future of the ecosystem is at stake, because, no doubt, more regulations are coming – we will have only ourselves to blame if we don’t like the results.
A new privacy standard
It’s important to note that although KYC/AML processes and regulations can hinder privacy, that doesn’t mean that they must.
There is no reason that approaches more consistent with the fundamental principles of cryptocurrencies can’t be devised to satisfy KYC requirements without placing too much data in the hands of a central provider (or a handful of providers) who could abuse it, or open it up to abuse through a catastrophic breach.
In fact, 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.
If our common goal is to advance mass adoption, blockchain and crypto companies should be prepared to work closely with the regulators and come up with new ways to solve big thorny problems. Simply put, we must build better technology.
Blockchain and strong cryptography enable multi-stakeholder use cases that simply weren’t technologically possible even a few years ago, and KYC/AML presents new exciting opportunities to revisit and uphold the original intent to curb bad actors and improve the protocol.
At present, the KYC/AML infrastructure mirrors guidelines implemented by centralized financial enterprises around the world. Just as traditional financial institutions require due diligence on prospective customers, cryptocurrency companies also rely on KYC/AML to collect personally identifiable information on individuals before allowing them to create new crypto wallets, do peer-to-peer lending, remit money across borders, or buy or sell crypto on an exchange. In the event a crime is committed, this information can be used to accurately pinpoint an offender and take appropriate action where necessary.
However, identity verification shouldn’t come with the risk of data compromise and extreme costs.
Through strong cryptography and through introducing decentralization into the current system and process, it’s possible to create protocol-level crypto rails to dramatically improve the handling of KYC/AML from the privacy and security perspective — all while reducing the cost of verification and clearing the barriers to mass adoption of cryptocurrencies and blockchain.
Once the costs are dramatically reduced, the upside of having strong and efficient KYC/AML regulations in place means more businesses will innovate and prosper. Progressive jurisdictions like Bermuda, Mauritius and Australia are already taking note and turning to the blockchain and crypto space for collaboration on legislation.
This levels the playing field for those billions of people without “legal ID” in a traditional sense, because new methods emerge to help assess people’s ability to repay loans, prove their credibility, transact and participate in the global economy. Traditional banking becomes a viable option then, as do the alternatives because there are new ways to transact and establish trust that don’t involve relinquishing full control of personal data. Finally, if the costs of KYC/AML compliance keep that global economic participation at bay, once that barrier is gone, imagine the freedom for innovators it would create.
This is why my team and other notable organizations are working to showcase the importance of KYC/AML and other important initiatives in the global cryptocurrency community — to prove, through tangible use cases, that it’s not preventing crypto innovation, it’s pioneering it.
Image via Unsplash.