Can Blockchain Be Key to Overcoming AML Challenge in Cryptocurrency?

sergey44 (66)in #crypto • 7 years ago (edited)

Special Counsel Roy Keidar of law firm Yigal Arnon & Co examines how Blockchain could provide the answer to the anti-money laundering issues that cryptocurrencies face.In 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 in cryptocurrencies, such as Bitcoin or Ethereum. The current AML system was originally tailored to address existing centralized financial services systems. By default, these guidelines cannot account for a financal system based on intrinsic anonymity.Rather, AML relies on the ability 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 currently in place attributes every transaction to a pre-identified legal entity. Data tracked in a fiat money paper-trail includes: (a) the financial system entry point, i.e. opening a bank account (b) any transaction within the system, for example, sending money from one bank account to another or use of swift platforms. The structure of Blockchain is not the only characteristic of the cryptocurrency system which benefits AML efforts. Crypto miners, who act as de facto enforcement, are integral to the system as well. Miners oversee the implementation of the protocol attached 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 alert and report-generating mechanisms could be integrated within the crypto-system, instead of monitoring only the entry and exit points.