As most investors and cryptocurrency project teams are aware, know your customer (KYC) compliance plays an important role in making sure that ICOs meet regulatory compliance standards. But why exactly is KYC becoming increasingly common?
In this article, we examine some of the top reasons why KYC is crucial for both current and future cryptocurrency projects.
Why does KYC exist?
Even before cryptocurrencies or ICOs existed, KYC has long been an important and well-established aspect of global finance. The core principle is that that both parties (project teams and investors) should know some information about each other’s backgrounds before the investment process begins.
Project teams can utilise KYC checks to verify a participant’s eligibility based on financial means, geographic requirements, and other basic information. KYC can also help prevent the potential for the use of cryptocurrency investments in criminal activity.
While KYC used to be an informal standard for ICOs and the cryptocurrency community, it is increasingly being adopted as an official standard by governments.
Global reach: navigating compliance across borders
One of the most important factors to establishing a successful ICO is being able to reach as many potential investors as possible. When the first ICO was established in July 2013, there weren’t all that many guidelines on how to ensure that a project met all legal requirements. This made it difficult for project teams to know which citizens around the world could or couldn’t invest.
Now, in 2018, regulatory frameworks are beginning to shape up around the globe. While some nations like China have decided to ban ICO investment altogether, other nations have become open in allowing citizens to invest in new projects. Other nations, like the United States, for example, are somewhere in the middle when it comes to ICO investment.
While some governments are still working on the establishment of these regulatory frameworks, even places that are considered to be very welcoming of cryptocurrencies have decided to still require project teams to complete KYC checks.
Trying to stay ahead of future regulations
Yes, it can be difficult to predict exactly what the world - much less the cryptocurrency market - will be like in a few years.
When it comes to regulations in the cryptocurrency market, there are a variety of opinions on what will happen. Still, it’s essential that project teams try to make efforts to be proactive in researching what future regulations could look like.
For now, KYC checks appear to be at the forefront of compliance. While the exact classification systems that cryptocurrencies will fall under could change, a few landmark cases (i.e. US SEC ruling of The DAO in 2017 and Ethereum in 2018) at least give some supportive evidence as to what project teams can do.
Part of the reason why compliance was once more difficult (and still is to a great extent) is the fact that very few precedents (i.e. similar ICOs) existed. As time passes, projects will be better prepared for these regulatory changes. Fortunately, for newer projects to emerge, it’s possible to learn from the success and failures of well-established projects.
Increasing possibilities for adoption and liquidity
While KYC is important for initial compliance with existing regulations, it has also become a major element of future adoption and integration. Just because a project has completed a successful ICO without KYC checks, doesn’t mean that it will succeed long-term.
For example, in the current cryptocurrency market, exchanges play a vital role in the success or failure of new tokens. Similar to cryptocurrency project teams, exchanges consider regulatory compliance to be a top priority. Surprisingly, it’s estimated that 68% of cryptocurrency exchanges are not fully KYC compliant in 2018. However, this is likely due to change as new regulations come into effect in the EU beginning in 2019. As a result, a cryptocurrency project team that doesn’t conduct KYC checks is probably less likely to have a new token added to top exchanges in the future.
As more projects are now completing KYC checks and a number of promising tokens are available for exchanges post-ICO, many exchanges are now requiring project teams to launch new tokens as well as exchange users to complete KYC checks.
Additionally, as we see the increasing popularity of utility tokens for industry-specific purposes, more companies have the option to choose to use cryptocurrencies over fiat. If cryptocurrencies are to be used in B2B, many companies could very well require (or at least favour) project teams that complete KYC checks as this would make it easier for companies using these cryptocurrencies to comply with financial and legal regulations.
Essentially, KYC provides one step forward for project teams to fulfil the intended use cases of their tokens and truly put tokenomics in action.
SingleSource and KYC Compliance
In summary, compliance with KYC requirements can benefit both ICO fundraising efforts as well as user adoption post-ICO. It can also potentially have a positive impact on the long-term market cap and liquidity of a given token.
Traditionally, KYC compliance has been a time-consuming, costly process. Now, KYC is becoming simpler and more cost-effective, especially thanks to applications like SingleSource’s blockchain-powered platform. For ICOs choosing to utilise SingleSource for KYC, financial and legal regulatory compliance doesn’t have to be complicated.
For more information on how SingleSource works to keep investors and companies secure during ICOs, download the free whitepaper here.