Launching an ICO? Learn Why KYC and AML Compliance Matters

As we’ve been approach by a number of companies interested in how KYC-Chain can be used for ICOs, we’ve chosen to use this month’s update to explain how KYC is important for token sales, and how KYC-Chain can help businesses scale while remaining compliant with complex global regulatory regimes: 

In recent years, Initial Coin Offerings (ICOs) have gained in popularity as a way for blockchain companies to raise capital to fuel expansion and future growth. Sometimes compared to a “kickstarter” or crowdfunding campaign, ICOs involve companies offering tokens or “coins” that can confer different types of value and benefits to their owners. Tokens are typically divided into two categories:

1. Utility tokens, which allow whoever holds them to access and use the company’s features and services, or to exercise voting rights on a company or project’s decisions, and
2. Security tokens, which confer equity ownership of a company or project

Many regulators around the world are now beginning to treat all tokens offered through ICOs as securities. This is critical from a regulatory standpoint, as dealing in securities involves complying with complex regulations designed to minimize the risk of fraud and money laundering, which is all too common in securities trading.

Is KYC Compliance that Important for an ICO?

When it comes to ICOs, the need for compliance – and the forms it has to take – is hard to generalize, as rules can vary significantly from one jurisdiction to the next.

A widely-recommended option is to err on the side of caution and to voluntarily ensure that diligent Know Your Customer (KYC) processes are in place and part of a robust Anti-Money Laundering (AML) protocol.
This is where automated KYC software like KYC-Chain can make all the difference. Here’s how it can help:

1. Stay ahead of the Regulatory Axe
   • Financial regulators are constantly expanding and evolving the laws VASPs are subject to, and many in the world’s larger markets are leaning towards classifying all tokens offered in ICOs as securities. Some regulators also exclude buyers from certain jurisdictions, so the KYC solution needs to be able to handle these exceptions automatically.
2. Comply with KYC regulations for future tracking and regulatory audits
   • Understanding who purchases a token is important for being able to track what happens to the token in the future. Some countries, such as the U.S., have rules governing the amount of time required for a security to be held before it can be sold again, so knowing who your customers are and where they are located is critical for remaining compliant.
3.  Create a verified track record to ease access to banks and the broader financial network
   • Most banks will want to have clear and verified information on sources of funds. By implementing a robust KYC procedure during your ICO, you’ll be better equipped to prove your funds were generated from legitimate sources, and that they have not been used for money laundering or other illicit activities.
4. Quickly and safely screen all token customers for presence on sanctions lists or risk
   • Using a risk-based approach, you can use KYC-Chain to segregate low risk from high risk customers, funneling the latter into more rigorous screening processes and Enhanced Due Diligence (EDD) techniques.
5. Build public trust
   • While there is a common misconception that KYC processes can have the effect of discouraging certain potential customers from finalizing their purchase, the reality is that most people and institutions feel safer doing business with companies that demonstrate they take security and compliance seriously.
6. Expand your potential pool of investors 
   • As KYC-Chain is built to factor in a wide variety of different jurisdictional regulatory frameworks, integrating the technology as your KYC tool will provide expanded access to potential customers and investors across the world while ensuring compliance with each jurisdiction’s legal regimes.

If you would like to learn more about how KYC-Chain can support your token sale or other projects, contact us directly and we’ll be happy to discuss options for collaboration.