With each year that we stray a little further from Satoshi Nakomoto’s whitepaper, cryptocurrencies become more popular than ever, breaking more barriers, not just out of sheer excitement, but also widespread acceptance. From non-fungible tokens (NFTs) to the Metaverse, 2021 was the year of cryptocurrencies, even after a decade where every two years it could do the same.
However, despite that peak enthusiasm and enthusiasm, we must not ignore the fact that there are still fundamental problems that need to be resolved before cryptocurrencies truly become the dominant ‘kingdom currency’ around the world, alongside the backbone of the next industrial revolution. Chief among these topics are protections against money laundering (AML), Know Your Customer (KYC) and Combating the Financing of Terrorism (CFT) which ensure that cryptocurrencies remain a responsible and stable payment option without excessive regulation. .
We are already seeing these kinds of issues with nations that are most excited about adopting crypto, be it through CBDC or other means. El Salvador has received headlines for converting Bitcoin (BTC) into legal tender and building a tax-free city financed by Bitcoin under a volcano, but the country has had its problems in the AML / KYC / CFT arena, such as when thieves The identity card compromised the Chivo Bitcoin Wallet, the mechanism through which El Salvador gave its citizens a “Bitcoin stimulus.”
Nor is it just about public entities. The rise of NFT in 2021 has created an entirely new need and emphasis for KYC / AML in a space dominated by flashy figures. OpenSea does not have a KYC compilation or an AML / CFT assessment, which means it is open to compromise.
To prevent crime and fraud from killing cryptocurrencies in its crib, or at least its elementary school, the industry must start taking proactive steps to self-control and self-regulate immediately. If they don’t, the task will be left to the same sort of clueless government officials who introduced you to the cryptocurrency provisions of the US infrastructure bill.
Related: DeFi: Who, what and how to regulate in a world without borders and governed by codes?
Emerging compliance as a service
While NFT platforms are beginning to integrate AML, KYC, and CFT, the standard is by no means consistent. “Old guard” auctioneers like Christie’s and Sotheby’s refuse to list those standards or describe them in detail. OpenSea, perhaps the main driver of the NFT boom, has so far resisted building any kind of AML / KYC on the platform itself.
As the popularity of NFTs continues to rise, like popular computer operating systems, these platforms will attract more hackers and identity thieves. The mainstream media loudly proclaim that “NFT scammers are here.” If 2021 was the year that NFTs amounted to the best use case we’ve had so far for cryptocurrencies, then 2022 will be a year that hackers and scammers will try to make the most of that popularity.
With the reluctance of the NFT platforms themselves to address this problem, it is up to other technology platforms to take over. These platforms can help NFT platforms develop stricter protocols and more detailed AML and KYC requirements before governments adopt backward and draconian regulations. Developing “Compliance as a Service” as an industry-internal solution will not only prevent fraud, but will drive even greater enthusiasm and commitment from people, financial institutions, and governments that still view cryptocurrencies as the irresponsible corner of the financial universe.
Businesses should be part of the growing compliance-as-a-service sector, but tackling the growing threat from NFT and blockchain scammers will not be enough, especially when entire countries look to blockchain as national solutions.
Clear AML / KYC Standards Equal To True Conventional Viability For Cryptocurrencies
Of course, some in the crypto community would rather not encourage or even acknowledge regulation of any kind, but that tactic and philosophy is simply neither realistic nor reasonable. The problems with El Salvador’s Chivo wallet demonstrated how quickly identity and security issues can stumble even the best-intentioned crypto launches. Nations continue to pursue KYC best practices as part of expanded crypto operations. Sri Lanka has conducted a KYC proof of concept. HSBC has worked with Dubai on its KYC.
Meanwhile, in the United States this year, the Financial Crimes Enforcement Network (FinCEN) issued its first AML / CFT priorities this summer. These priorities include corruption, cybercrime, terrorist support, fraud, transnational crime, drug and human trafficking, and financing of weapons of mass destruction.
While different nations are at different steps in the AML / KYC / CFT process, some clear guidelines are emerging. With 195 different countries, yes, there can be 195 different standards for regulating cryptocurrencies. However, after several years of guidelines, regulations and sanctions, the industry has more than enough parameters to start tailoring AML / KYC / CFT solutions and supervision in different jurisdictions. This is just one more reason why the industry, itself, needs to be proactive, developing a comprehensive, easily understandable and internationally recognized standard that is easy to adopt in as many jurisdictions as possible.
Related: The United States Updates Its Crypto AML / CFT Laws
What the industry cannot do is allow blockchain to be plagued by the same kinds of “wild west” pitfalls that characterize the internet. Yes, the popularity of the Internet is indisputable, but that has come with the sacrifice not only of privacy, but of the primacy of truth and healthy communication between people. That means building a new identity model, based on the trustless system of the blockchain, but also a model flexible enough to meet reasonable AML, KYC and CFT standards.
This article does not contain investment advice or recommendations. Every trade and investment move involves risk, and readers should do their own research when making a decision.
The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jonathan Camilleri Bowman is the CEO of Sekuritance, a multidimensional RegTech ecosystem that provides compliance, regulatory transaction monitoring, and identity management to individuals and business corporations.