Blockchain has brought revolutionary changes to many industries, but it has brought the greatest changes to the financial industry. From stock crowdfunding platforms that allow users to buy shares in securities projects, to startups raising funds through ICOs, to token exchanges where users can buy and exchange cryptocurrencies, blockchain is transforming the savings of millions of people around the world. , ways to transfer and invest funds.
Over the past decade, however, financial institutions of all types and sizes have come increasingly under the radar of regulators around the world. From GDPR to KYC to anti-money laundering, regulators are forcing financial institutions to build systems to screen and monitor users or face hefty fines.
Although compliance with regulations is an important part of modern business operations, these issues create cultural dilemmas for institutions using blockchain. One of the fundamental principles of this technology is to democratize the world of investing, “eliminating the middleman” by decentralizing transactions and sending, saving and investing anonymously. Many regulations require just the opposite. Is it possible to adhere to these rules while still adhering to the original principles of blockchain? Or are these new regulations likely to nip blockchain in the bud? Three new regulations are driving change within blockchain. What impact will each regulation have on the technology? What impact will these regulations have on the original anonymity and decentralized power structure of blockchain? Let’s take a look:
Who is buying what: KYC
The first rule to change the status quo is the "know your customer law", which is also strongly promoted by US regulators. Generally speaking, KYC compliance requires financial institutions to conduct due diligence, establish a Customer Identification Plan (CIP), and require users to present a passport or ID card that matches official registration. While most respectable ICOs, crowdfunding platforms, and cryptocurrency exchanges employ strict KYC procedures, the challenge is not in gathering initial information but in ensuring that the information is kept up to date and shared among trusted organizations.
To the average citizen, this may not sound like a big deal, but requiring governments to provide proof of identity directly goes against one of the fundamental principles of blockchain. Remember, this technology is admired by many for its ability to decentralize power and democratize. So how does one appease lawmakers with KYC enforcement while staying true to its origins? Through the blockchain itself. Storing identifying information on a blockchain, managed by a secure third-party organization such as a government agency, could solve this problem. All financial institutions can submit and update user information on the blockchain. Users' information will be linked to their electronic identification number rather than their name. This means that if a user is flagged or banned by one agency, that information will be updated on the blockchain, providing transparency to other agencies.
Follow the money: AML
A second U.S.-led regulation targets money laundering, raising a host of concerns. The Anti-Money Laundering Act (AML) requires financial institutions to prevent, detect and report potential money laundering activities. Financial institutions engaging in suspicious behavior must notify the relevant authorities within their jurisdiction and freeze any further transactions until the suspicious customer is removed. Failure to do so could result in hefty fines, or the closure of the institution or platform, which poses challenges for blockchain because the frequency of transactions is so high. Unlike the KYC process, which only needs to be completed once, AML requires continuous monitoring of all transactions made by an individual and a system in place that enables financial institutions to monitor any of their users and flag or ban other entities from participating.
The advantage of this system is that once user information is stored on the blockchain, it will also increase accessibility to other financial institutions around the world who grant access to third-party blockchain controllers. This will also simplify authentication for users. Once registered through an agency, users will effectively use their electronic identification number to authenticate to all different services. However, this also means that if one service is flagged or banned, they will effectively be banned from all services accessing blockchain information.
Filing information: GDPR
Last but not least are the European regulations introduced under the EU General Data Protection (EU Data). GDPR, introduced in May this year, regulates how financial institutions store and publish customer data. While most financial institutions have legitimate reasons to collect basic user data and store transaction data for up to 10 years, they need to be cautious when storing personal user information on the blockchain. Once information is stored on the blockchain, it cannot be edited or deleted, which could cause further problems if financial institutions store personal data such as names, email addresses, etc.
The solution to this problem is to store user data on the blockchain using only numbers (such as electronic identification codes). This means that a company does not have to worry about deleting personal information if it receives a "forget request" from a customer. However, for this policy to work, more governments need to follow forward-thinking countries like Switzerland and Estonia in offering e-citizenship options.
Improve blockchain
This is clearly a testing time for blockchain. As the technology attracts public interest and international investment, it also attracts a harder stance from government agencies. Solutions to these challenges are still evolving, and look at how the blockchain community is responding to stricter operating guidelines, especially as regulators compete with each other: third-party verification versus decentralized, anonymous storage of personal information.
The backlash from the cryptocurrency community began when cryptocurrency exchanges announced that they would be rolling out KYC processes. The cryptocurrency exchange previously relaxed its registration process and required minimal personal data. However, while many were quick to criticize, others recognized that the founders were simply reacting to extreme pressure from regulators.
Financial institutions using blockchain are in trouble. On the one hand, they need to comply with regulations or risk hefty fines or closure, but doing so risks undermining the fundamental principles of blockchain decentralization and anonymity and potentially losing users attracted to these principles. Still, for blockchain enthusiasts who want to move away from centralized, controlled systems, handing power to governments (which have their own trust issues to deal with) may be viewed increasingly poorly.
But is it possible for these institutions to comply with regulations without completely violating their founding principles? Time will prove everything.
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