Can Blockchain Be Key to Overcoming AML Challenge te Cryptocurrency?

Can Blockchain Be Key to Overcoming AML Challenge te Cryptocurrency?

Special Counsel Roy Keidar of law rock hard Yigal Arnon & Co examines how Blockchain could provide the reaction to the anti-money laundering issues that cryptocurrencies face.

Special Counsel Roy Keidar of law rock hard Yigal Arnon & Co examines how Blockchain could provide the response to the anti-money laundering issues that cryptocurrencies face.

Blockchain, KYC, Israel, AML, Money Laundering

Special Counsel Roy Keidar of law rigid Yigal Arnon &, Co examines how Blockchain could provide the reaction to the anti-money laundering issues that cryptocurrencies face.

Te what some are coining a landmark case, an Israeli District Court recently ruled that Israeli banks are not obligated to provide financial services to companies whose primary business is trading ter cryptocurrencies, such spil Bitcoin or Ethereum.

Landmark case

The Court reasoned that banks should not have to assume the risks associated with providing a financial toneel to thesis digital currency businesses when the leading Israeli authorities on the subject, namely the Central Canap, the Securities Authority and the Anti-Money Laundering and Terror Financing Authority, have bot fighting to delineate clear measures to minimize them.

One of the primary risks noted by the Israeli authorities, along with regulators around the globe, is the pseudo-anonymous nature of cryptocurrency. Regulators view the digital token transfer method spil a ",black opbergruimte,", low te accountability and virtually unlikely to subject to existing anti-money laundering (AML) and anti-terror financing regulations. However, inflexibility may be clouding judgment: built-in features of cryptocurrency, particularly Blockchain technology, have the potential to improve, not harm, AML efforts, even surpassing mechanisms already te place today.

AML contradictions

The growing stress inbetween the fast-growing cryptocurrency industry and AML guidelines is fueled by several factors, beyond Bitcoin&rsquo,s somewhat misguided reputation spil a beloved of hackers and criminals, the primary of which is its structure.

The current AML system wasgoed originally tailored to address existing centralized financial services systems. By default, thesis guidelines cannot account for a financal system based on intrinsic anonymity.

Rather, AML relies on the capability to monitor and exploit the Know Your Client (KYC) process, identifying information which every financial institution is required to account for by law.

The AML monitoring mechanisms presently te place attributes every transaction to a pre-identified legal entity. Gegevens tracked ter a fiat money paper-trail includes: (a) the financial system entry point, i.e. opening a canap account (b) any transaction within the system, for example, sending money from one bankgebouw account to another or use of swift platforms.

The systems then monitor the financial activity, evaluate the AML risks associated with such transactions, and go after up with any relevant notifications and reports. Use of the financial proceeds of a crime, when identified, can be lightly attributed to a particular person and legal measures applied accordingly.


Critics of cryptocurrency point to the lack of identifying information across digital transactions spil a substantial obstacle to existing AML surveillance and enforcement capabilities.

However, all of thesis essential regulatory and enforcement elements&mdash,identifying parties and information, a record of the transaction and even enforcement&mdash,can all exist ter the crypto-currency system. It',s all a matter of adjusting perspective.

Firstly, cryptocurrency accounts for the identity of its users both at the beginning and end of transactions through digital wallets. Tokens are stored ter electronic wallets instead of canap accounts. Only the wallet-owner has access to their wallet.

The holder can send and accept tokens from one wallet to another by providing the identification code of their wallet to the other side of the transaction. The code itself acts spil a key, eliminating the need for names or other types of identification.

Spil such, the transaction itself is seemingly anonymous. However, ter most countries today, one needs to go through the process of KYC ter order to open a fresh digital wallet.

Hence, by virtue of wielding an electronic wallet, even without necessarily using it, anonymity is compromised. Nevertheless, ter some places, wallets can still be opened without a decent identification process, which potentially may permit ",dirty money", into the system.

",Dirty money", and other issues like coin-join and ",smurfing,", make it difficult to attribute a financial transaction to a specific legal entity, presenting a problem still ter need of a solution.

One possibility is the expansion of KYC spil a worldwide prerequisite to issuing global e-wallets by setting designated wallet standards, thereby prohibiting token transfer to a wallet which does not meet those same standards. Considering there is only one type of entry and uitgang point, unlike the numerous exchange platforms available ter the fiat system, cryptocurrency could conceivably enhance identity tracking capability.

Reducing AML risks

Evidently, such specifications would require overeenstemming by key players te the industry and complimentary regulation. The latest upswing ter fresh KYC requirements for fresh and existing wallet owners internationally suggests that such standardization could be crucial for ensuring the zindelijk functioning of the growing future crypto-currency industry spil it nears sovereign recognition.

Additionally, thanks to Blockchain technology, cryptocurrencies inherently wield the potential to actually reduce AML risks when compared with fiat currencies.

The Blockchain is an online public ledger, where each transaction is supervised, validated and recorded spil a finish transaction history. Public ledger viewers and crypto miners are instantaneously notified of any transfer from one holder to another. Furthermore, unlike counterfeit hard currency, which governments spend significant sums attempting to combat, cryptocurrencies are almost unlikely to forge spil each carry their own unique characteristics, which are verified from end-to-end by miners. Without verification of all transaction phases, including the departure wallet, the destination wallet, the currency type and amount, the transaction is blocked instantaneously without any human supervision. Te this sense, the digital trail could better serve AML regulations than existing fiat paper trail.

The structure of Blockchain is not the only characteristic of the cryptocurrency system which benefits AML efforts. Crypto miners, who act spil den facto enforcement, are integral to the system spil well. Miners oversee the implementation of the protocol affixed to the Blockchain code, and validation of transactions vis-à,-vis solving the encryption algorithm. Once a validation is announced to the network, other miners ",check the math,", and a block is added to the ledger only when the required number of miners has verified the transaction. Similarly, the Blockchain protocol could be revised to limit transactions to KYC-verified wallets only. All transactions could be traced back to an identified e-wallet. Moreover, AML risk analysis and bedachtzaam and report-generating mechanisms could be integrated within the crypto-system, instead of monitoring only the entry and uitgang points.

Spil cryptocurrencies build up mainstream public attention, and more individuals are putting their skin ter the spel, addressing AML challenges has become crucial.

At the core of the crypto system, Blockchain technology',s inherent characteristics offerande a toneelpodium to address, if not overcome thesis challenges altogether.

Evidently, there will be a price associated with te the form of higher transaction costs and less anonymity. But, it',s a price worth paying to permit for cryptocurrency to carry onward and switch the face of money spil wij know it.

With the cost of global AML measures presently estimated at overheen $Ten bln annually, the Israeli authorities, spil well spil law and policymakers worldwide, would be prudent to look before they leap. Ensuring their good intentions to protect financial institutions and that citizens don&rsquo,t end up blocking a technology could provide a comeback on investment that far surpasses the price of transitional uncertainty.

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