ICOs and when “KYC/AML” isn’t actually KYC/AML

We are seeing a lot of references to KYC/AML in the ICO/STO space. Lots of shops include this function as part of their pitch to create smart contracts and host the offering on their platform.

The problem is that what they are doing in most cases isn’t actually KYC/AML and this could lead to confusion in the future.

KYC, or “know your client,” is the process that a regulated entity like a broker-dealer goes through in order to establish not just the identity of its client, but also that client’s risk tolerance and the suitability of the investment for the client in question. Online platforms that are brokers routinely do this through a series of questions when the investor is onboarded, and frequently follow up with a telephone call to the investor.

AML, or anti-money laundering, refers to the processes that entities subject to money-laundering laws (which does not include non-broker online ICO platforms) must set up to prevent money laundering. This includes establishing internal rulebooks and operating procedures covering things like verifying identities, recordkeeping and contacting the authorities when a suspicious payment is processed.

In most cases, these are not the things that ICO platforms are doing. To be clear, not doing them isn’t a violation of any rules; ICO platforms are not required to do these things any more than ice cream shops are. What most of them are doing is establishing the identity of the investor (and often their status as accredited or offshore investors) and then running checks of the investors to make sure they aren’t from countries that prohibit ICOs or investors or countries on sanctions lists. These processes are essential to ensure the initial offering is conducted compliantly, but they aren’t sufficient for a full KYC/AML program.

Why does this matter? Because it’s going to cause confusion later. If a broker gets involved in the offering, that broker is going to have to do “real” KYC and potentially annoy potential buyers who have already been “whitelisted” and thought they were clear to invest. Likewise, subsequent secondary trading is going to involve a broker or ATS that is going to have to do its own KYC and full AML processes.

Join CrowdCheck

More Blogs