KYC, AML: The role of blockchain in crypto compliance

Hello and welcome to Protocol Fintech. This Thursday: crypto KYC on the blockchain, David Solomon’s DJ concerts, and the unlikely return of Zuck Bucks.

out of the chain

Miami’s claim to be a crypto financial hub has a 3,000 pound symbol: an updated version of the Wall Street bull with glowing laser eyes. It’s a little “RoboCop” and a little “Alien” and a little eye-rolling, but I don’t know if that’s the worst thing in the world. Unveiled for Bitcoin Week, the bull will permanently reside on the campus of Miami Dade College. The real future of the city will be built there: without a steady stream of skilled technical graduates, Miami’s crypto sector will flounder.

—Owen Thomas (E-mail | Twitter)

Know your customer (crypto)

Cryptocurrency is known for its inherent anonymity, a feature that threatens regulated financial institutions required to know their customers. But there is actually no contradiction between crypto and KYC compliance. In fact, blockchain could revolutionize customer identity protocols in a way that is compatible for everyone.

Last February, a group of major crypto companies, led by Circle and Coinbase, introduced a digital identity protocol designed for blockchains, Verite, which promises to comply with standard “know your customer” requirements while allowing users to have “self-sovereign control over their identity.”

KYC exists for a reason. The fight against money laundering and the prevention of the financing of terrorism require the control of identity documents.

  • In conventional banking, KYC also benefits financial institutions. Banks do not want to serve criminals and scammers.
  • Cryptocurrency, however, is built on a trustless foundation, meaning you don’t need to know who someone is to trust a transaction.
  • There is another twist in crypto: since crypto transactions are trackable and traceable on the blockchain, breaking the anonymity of crypto can mean destroying the financial privacy of users. Crypto exchanges that store KYC data on customers are therefore attractive targets for hackers.

There is no reason why KYC cannot be built on the blockchain. In fact, it has unique advantages.

  • For financial institutions, KYC is not just one thing. This includes up-front identity verification when onboarding a new customer, ongoing customer monitoring, and ongoing monitoring as sanctions lists and other sources of information are updated.
  • Tony Peccatiello and Suzanne Elovic of Parallel Markets recently proposed a system in which participants upload their personally identifiable information in encrypted form to the blockchain, unlocking it for financial institutions. Monitoring and screening could take place in the same way, with periodic reviews confirmed by authorities and the results of these checks also stored on the blockchain.
  • This proposal is very similar to Verite, which overlays identity on cryptographic proof visible only to those authorized to verify credentials.

Coins, blenders, and privacy cups could complicate things. Technology is constantly evolving.

  • Some privacy coins seek to hide blockchain transactions by fabricating addresses, scrambling wallets, or mixing transactions. Cups and mixers accomplish some of the same things for protocols that don’t have built-in privacy features. But even the most private cryptocurrency transactions can be traced on the general ledger.
  • There is also the conundrum of decentralized exchanges. These open, trustless, permissionless systems operate on a shopper-in-the-know basis, and implementing KYC can be more challenging for them.
  • Crypto’s usefulness for day-to-day payments remains limited. Converting crypto to fiat and vice versa creates weak points where investigators can link accounts to identities.

Crypto KYC can happen. And the industry seems increasingly on board. Proponents of Verite and other industry solutions consider putting KYC on the blockchain to be a much better outcome than modernizing slow, expensive, and conventional KYC for cryptocurrencies. The challenge may be educating consumers on how to maintain and secure their own identity. Already, hackers have shown a lot of interest in crypto phishing clients. Knowing your customer is one thing; the next challenge is whether your customer is really your customer.

— Leah Zitter (E-mail | Twitter)


Get ready to live stream the Plaid Forum 2022 on May 19. Join the world’s largest companies and build the future of digital finance. Registration is now open!

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on the money

On protocol: Binance.US raised $200 million in a seed funding round, bringing its valuation to $4.5 billion. The next step, according to Wall Street chatter, could be an IPO of the crypto exchange’s US unit.

Meta takes another turn in virtual currencies. Called “Zuck Bucks” internally, an unencrypted token could be used in virtual reality environments, according to the Financial Times reports. This is sure to give anyone processed with Facebook credits ten years ago, flashbacks. Meta is also considering a “designer piece” for Instagram. The only problem: his financial unit experienced a mass exodus of employees after the failure of the Diem crypto project.

BitPay has added support for Lightning Network payments. This means that BitPay merchants can accept bitcoin payments from Lightning wallets like Block’s Cash App as well as Strike, faster and cheaper bitcoin payments could become more mainstream.

Also on Protocol: Sky Mavis, owner of Axie Infinity, has raised more than $150 million in funding to bolster its balance sheet as it plans to reimburse users affected by the $625 million hack last week. The funding round was led by Binance, with participation from a16z, Animoca Brands, Paradigm, and Accel.

Zelle comes for Visa and Mastercard. Big banks are reportedly considering introducing Zelle to retail, making it an in-store payment option, and putting it in direct competition with card network giants Visa and Mastercard.

A new round of US sanctions hits Russia and its largest bank, Sberbank. Punishments include banning Americans from investing in Russia; and individual sanctions against Putin’s two daughters, the wife and daughter of Russian Foreign Minister Sergey Lavrov and senior Russian Security Council officials.

Salvadoran President Nayib Bukele has withdrawn from Miami’s Bitcoin 2022. Notorious bitcoin champion himself, the Salvadoran president had to withdraw from participation at the last minute due to “unforeseen circumstances”.


Blockchain critique Jamie Dimon admits that DeFi is real, that neobanks are outperforming big traditional banks, and you need to be prepared for this trend to continue. “It seems unlikely to me that all the banks, shadow banks and fintech companies will thrive as they strive to partake of each other over the next decade,” the JPMorgan Chase The knowledgeable CEO in his inescapable letter to shareholders.

Goldman Sachs CEO david solomon DJs on the side, and was recently booked for Lollapalooza. But is it good? Some in the DJ community don’t think so. Matte Blacka British DJ and half of the music duo cold cut, called Solomon’s music “Generic McDance” and said his Lollapalooza reservation was “of bad taste”.

Sushil Kumar ModiMember of Indian Parliament, wants to raise taxes on cryptos to 50% from 30% previously. “We gave time to younger people who want to get out (cryptos). Those who want to stay will face higher taxes because it’s like gambling,” he said in a interview with Forkast.

Moves and hires

Max Bronstein joined Synapse as Chief Operating Officer. Bronstein was before member of the institutional hedging team at Coinbase Ventures and director of business development for Dharma’s lending team before that.

Chris Janczewski has joined TRM Labs as Head of Global Investigations. Janczewski was special agent to the IRS for criminal investigations, including serving as the lead agent in the investigation into the Bitfinex hack.

Mastercard has appointed Chad Wallace as Executive Vice President of B2B Solutions. Wallace was the head of digital at Goldman Sachs, and was before Head of Digital Experiences for Commercial Banking at Capital One.

U GRO Capital has appointed Smita Aggarwal as an additional independent director. Aggarwal is also a Independent Director at IIFL Asset Management Company and Global Investment Advisor at Flourish Ventures.

Chainlink Labs has appointed Dahlia Malkhi as Director of Research. Malkhi was once Director of Technology at the Diem Association and Senior Researcher at Novi.

MX has appointed Kimberly Cassady as Director of Human Resources. Cassady was before Director of Talent at Cornerstone OnDemand for a decade.


Get ready to live stream the Plaid Forum 2022 on May 19. Join the world’s largest companies and build the future of digital finance. Registration is now open!

Learn more

Thanks for reading – see you tomorrow!

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