KYC Controls Enter the Crypto Wallet Space

 

One of the most beneficial aspects of using cryptocurrency is the ability to move digital money from wallet to wallet with no identifying trackers tying transactions to the identities of the sending and receiving parties. That feature facilitates financial privacy for digital wallet users. But the state of New York doesn’t like it.

 

Afraid of money laundering, the New York Department of Financial Services (NYDFS) has issued guidance to licensed virtual currency businesses to use blockchain analytics.

 

NYDFS suggested three control measures that could mitigate illegal activities such as money laundering and terrorist financing. These are:

  • Know Your Customer (KYC) controls
  • Transaction monitoring of on-chain activity
  • Sanctions screening of on-chain activity

 

The agency is asking virtual currency entities to have policies, processes, and procedures in place to assess counterparty exposure for virtual currency transfers.

 

Regarding transaction monitoring of on-chain activity, NYDFS wants crypto-related businesses in New York to assess whether a virtual currency is being used in one of five ways:

  1. Exposes itself to a high-risk or sanctioned jurisdiction (for instance, Russia);
  2. Is processed through a mixer or tumbler;
  3. Is sent to or from darknet markets;
  4. Is associated with scams or randomware;
  5. Or is associated with any other illegal activity relevant to the virtual currency entity’s business model.

 

Finally, NYDFS is concerned that virtual currency businesses identify wallet addresses that may be connected to sanctioned individuals and entities on the Specially Designated Nationals (SDN) list or located in sanctioned jurisdictions. In April, for instance, the Office of Foreign Assets and Control (OFAC) office added several names to the SDN list for Russia.

 

Essentially, what this means for any business dealing with virtual currencies in the state of New York is the business must be proactive in getting a better handle on how wallet addresses are being used in connection with their business. The NYDFS believes blockchain analytics can help those businesses gain that understanding. It may also mean that other states could follow New York’s example with one striking ramification: Mainstream adoption of cryptocurrencies may not come until states, and the federal government, are able to implement KYC controls that protect both the consumer and national security.

 

Coinbase Intros Know Your Transaction for Crypto Compliance

 

In related news, Coinbase is introducing a product the crypto exchange hopes will gain them more trust among consumers and state and federal governments. In a blog post, the firm wrote:

 

As a result, we’ve spent years engineering solutions that assist with our compliance obligations; many of these same needs are shared by our clients.

 

Announcing the addition of a Know Your Transaction (KYT) tool to the Coinbase Intelligence suite of products, Coinbase’s intent is to assist businesses in New York and elsewhere comply with NYDFS’s new guidance. Through an API, a business can screen transactions to determine whether those transactions are risky or could potentially violate sanctions. Coinbase uses a proprietary risk scoring system to help virtual currency businesses make that determination.

 

Coinbase’s KYT tool will perform the following functions:

  • Automate real-time transaction monitoring
  • Alert businesses to any changes in a customer’s risk profile
  • Configure rules engines and risk insights into third-party case management tools
  • Screen transactions for anti-terror financing and other anti-money laundering red flags

 

Coinbase is the largest regulated cryptocurrency exchange in the U.S. That means it has a huge incentive to comply with federal and state laws in all U.S. jurisdictions. It’s not surprising to see the company taking the NYDFS guidance seriously. This will likely cascade to other crypto exchanges who compete with Coinbase in the cryptocurrency ecosystem. Instead of being a tool of anarcho-capitalism, cryptocurrency will likely become a mainstream digital currency alternative to cash and the current banking system. For that reason, KYC controls are necessary for the protection of consumers and state and federal interests.

 

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