Flip Side of the Coin: “Know Your Bitcoin” Providers, Too

Actimize FMC Product Team, Financial Markets Compliance

The Know-Your-Customer (KYC) space is one that many of us know all too well. Focused on reducing on-boarding risk for financial services firms by instituting a series of regimented and strict rules about accepting monies from a new client in addition to ongoing KYC checks, this realm of the anti-money laundering world has proliferated in the past decade or so, occasionally being updated and tweaked with legislation such as Section 326 of the USA PATRIOT Act.

In recent months, the need for such a prescriptive focus on these regulations has garnered much attention as it relates to Bitcoin, that famous cryptocurrency appearing in the news every day with ever-increasing hype, speculation, and discussion. Specifically, various national and local (think of various U.S. states, for instance) regulators have jumped on Bitcoin and proclaimed that it is illegal or not trustworthy due to the inherent anonymity of it and its transactions. Although, recently, divergent viewpoints about this supposed anonymity on this have emerged.

Most regulators feel that, by not knowing from whom one is accepting bitcoin-based transactions, KYC rules are being ignored and the public is therefore being put at risk from money laundering criminals, terrorists, and others possibly rooted in organized crime.

But the recent news of the Mt. Gox closure, the downfall of Flexcoin, and now the news about Poloniex clearly demonstrate that there are two sides to this coin (yes, that pun was entirely intended!) of “knowing” someone. Specifically:

  • Know Your Financial Institution: While I wouldn’t necessarily go so far as to argue that Mt. Gox is a financial institution, it certainly provided similar financial services offerings and products to its clients and in that respect, its customers perhaps should have read some of the terms and conditions a bit more closely.
  • Know Your Wallet: Who is holding your Bitcoin wallet? What are their terms and conditions? Who ultimately can recoup your funds if a problem occurs? Which country’s financial regulator should you approach if a problem occurs?

Cryptocurrencies hold tremendous promise for poor countries, micro-donations, and myriad other applications down the road. And yet, they also pose possible danger to combatting financial crime, terrorist financing, etc. due to their purported anonymity. What is interesting is how few people compare cryptocurrencies to the anonymity of cash, which is totally untraceable and quite anonymous in an era of location-tracking on our mobile devices and other items that would be of concern to a criminal.

If you’re a cryptocurrency user, it behooves you to consider not only the risk inherent in the currency’s own speculative nature and resulting fluctuation, but perhaps also the interests and capabilities of those who want to “help” you transact, store, and maintain your cryptocurrency hoard. Ask the same hard questions you would have any financial institution that you currently invest with, so that you are not sitting in front of an abandoned building with a sign and empty pockets like many early Mt. Gox investors were seen doing in the past few weeks.

Meanwhile, Richard Branson accepts Bitcoin for travel on Virgin Galactic – and the Winklevoss twins have already paid for their flights from their Bitcoin stash! Considering Branson’s target audience for $250,000 space flights, not bad product placement. Maybe there is hope for Bitcoin’s future after all!

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