In this article, Rachid Ajaja CEO and Co-founder of AllianceBlock lays out the reasons why crypto cannot survive without working KYC processes.
As gatekeepers of traditional financial markets, one of the foremost imperatives for banks and financial institutions is to uphold the integrity of, and trust in, the markets themselves. History has shown that this moral burden alone has not stopped such institutions from engaging in suspect behavior, with governments across the world responding by enforcing regulations to ensure these institutions adhere to the rule of law. A recent report by Fenergo found that in 2020, penalties incurred by financial institutions for non-compliance with Anti-Money Laundering (AML), Know Your Customer (KYC), data privacy, and Markets in Financial Instruments Directive (MiFID) regulations totaled a staggering $10.6 billion globally. Such large figures have spurred institutions to update their KYC and AML processes in order to cut down on money laundering and prevent criminal activity in the financial markets, however with increasing amounts of cross-border activity and a lack of jurisdictional standardization, these updates have still fallen short. In comparison to the AML and KYC processes in the world of cryptocurrencies, traditional markets are lightyears ahead. A longstanding obstacle to the formal acceptance of cryptocurrencies by governments around the world and the subsequent mass adoption that would likely ensue is that the crypto space is a highly lucrative target for money laundering. In 2019, almost $3 billion was laundered through different cryptocurrency exchanges, many of which lack the AML and KYC processes that keep would-be launderers away from traditional financial institutions. One study even found that over half of all crypto exchanges had weak or non-existent KYC processes. Laundered money can be used for everything from basic tax evasion and drug or human trafficking to domestic and international terrorism. For a nascent industry that wants to become mainstream, allowing the proceeds of such illicit practices to flow through crypto markets is certainly less than ideal.
