In the grey area of regulation
Regarding the uncertainty about how to deal with cryptocurrencies in accordance with the law, the cries for an unequivocal regulation are becoming increasingly louder. Recently, the Swiss and German financial supervisory authorities have set out how they intend to apply the legislation concerning ICOs, the so-called Initial Coin Offerings, and have referred to existing laws – depending on the economic function and purpose of the tokens issued by the ICO organiser.
Used as a payment token or as financial resources, compliance with anti-money laundering regulations will be required. In its release of February 20th, the German BaFin pointed out that it is necessary for crypto providers to conform with the law. In this respect, crypto platforms as well as some ICOs in Germany are thus obliged to legitimize their customers in compliance with the AML legistlation. With the Swiss and the German supervisory authorities now advancing in terms of regulations, the financial sector follows further developments in the other European markets with tension.
Again here is the question, if the ICOs and crypto currencies are subject to the respective AML laws.
The need for KYC
Depending on the system, cryptocurrencies are particularly prone to fraud. In theory, the transactions of the respective Blockchain, on which the currency is based, are visible for every network participants. But the users can remain completely anonymous as long as they are not obliged to be identified. Therefore, in terms of transparency, there is an increasing number of crypto traders who are relying on Know Your Customer (KYC). Whenever an ICO or a crypto trading platform is subject to the AML legislation, they are in the same way as other financial institutions obliged to legitimize their customers in compliance with the law. So the crucial question at this point is: In which case does the law apply?
The identification expert IDnow observes already since more than one year an increasing number of crypto platforms using the video-identification which is compliant in many European countries. In December, IDnow had performed eight times more video identifications for opening an account in the crypto sector than 10 months ago. The reason: “Our patent protected ID verification technology first of all conforms to European AML legislation and meets the providers’ need for more security. Furthermore, we were able to ensure an online only, virtually friction free experience that helped our crypto exchange clients sign up thousands of new end users in a short space of time,” states Rupert Spiegelberg, CEO at IDnow.
After all, trading with virtual currencies is – when completely unregulated – particularly lucrative for fraudsters. This can already be concluded from the fraud attempts during the registration process. According to the experiences of IDnow, the rate in the case of accounts opened in the crypto sector is four times as high as in the traditional finance sector.
The solution: digital identification
In order to prevent fraud and whilst waiting for the imminent regulation of crypto-currencies, two digital identification processes have currently been implemented by crypto traders: the law compliant video-identification and the identification via electronic photocopy of the ID document, which is used internationally.
Given their digital DNA, cryptocurrencies need far more than the conventional banking sector a completely digitalised identification process. Therefore, a special identification solution will soon be available for all ICOs and crypto providers who are not obliged to legitimize their users via video-chat. Whether via photo or video-chat – both processes will put an end to pseudonymity and bring more transparency to the crypto jungle.