13.12.2019

Know Your Customer and Know Your Company, Here’s Why

As one Redditor notes:

“The point of crypto is to get away from banks which have your money in a safe where nobody can find it. Bank cryptos are the same as having another bank account. KYC (Know-Your-Customer), why do people need to know where the money is coming from? Banks and countries are trying to control you again by enforcing laws where you have to give your data when you pay for stuff. Why? So, they have control over you. We still pay tax when we buy things, so why the hell do they need to know who paid it.”

The cryptocurrency industry has primarily been operating without a watchful eye from regulators such as financial watchdogs the world over. Unfortunately, some in the cryptocurrency space hold that being regulated is opposite to what crypto is all about; freedom from regulators.

Importance of Know-Your-Customer

Although crypto enthusiasts see it unfit, know-your-customer procedures are necessary to ascertain the identities before they can access cryptocurreny related products and or services. With these procedures, it’s possible to prevent money laundering, terrorist financing, among other malpractices.

While some may argue that these procedures go against the very nature of virtual currencies, they are of apt importance. For examples, crypto exchanges that handle fiat deposits need to establish a working relationship with a bank. Consequently, banks have anti-money laundering regulations that make Know-Your-Customer procedures necessary.

To avoid their funds to be frozen by banks, cryptocurrency exchanges must perform Know-Your-Customer verification on every customer. For a crypto exchange to circumvent the customer verification process, it may opt not to handle fiat deposits. However, this would negatively affect cryptocurrency adoption.

What about Know-Your-Company?

Unfortunately, the customer verification process works one way; only the company verifies the customers, but the customer has no way of verifying the company. The company verification process would give investors a way to vet the identities of team members. The United States Securities and Exchange Commission (SEC) is among the few legit ways in which investors can know the team members behind a crypto project before investing.

Unfortunately, the SEC operates in the United States and targets crypto projects that develop products deemed to be securities. With verified crypto projects, the teams are likely to live up to their promises.

Without a way to vet the team behind a crypto project, investors end up losing their money on scams. In a study done by Statis Group, an ICO advisory firm, noted that over 80 percent of initial coin offerings conducted in 2017 were scams.

Some of the biggest scams in the history of cryptocurrencies include OneCoin, BitConnect, PlexCoin, Entrance, and PinCoin & Ifan. The scams made away with approximately $30 million, $700k, $15 million, $32 million, and $660 million respectively.

However, if investors had a way to vet the projects’ team members, it’s possible the amount stolen, and the number of investors duped would be much smaller.

But,

“If they want to remain anonymous, then that’s fine, but they shouldn’t be asking for upfront money and KYC in exchange for code that hasn’t been written yet.”

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