@xiti - In this guest opinion, Special Advisor Roy Keidar and Associate Netanella Treistman of the Yigal Arnon & Co. law firm examine how blockchain can provide answers to anti-money laundering issues facing crypto currencies.
In a number of important cases, the Israeli District Court recently ruled that Israeli banks are not obliged to provide financial services to companies whose main business is traded in crypto currencies, such as Bitcoin or Ethereal. The court reasoned that banks should not bear the risks associated with providing this financial platform for the digital currency business when leading Israeli authorities on this issue, namely the Central Bank, the Securities Authority and the Anti-Money Laundering Financing Authority, themselves have struggled to portray clear steps to minimize it.
One of the major risks noted by the Israeli authorities, along with regulators around the world, is the nature of crypto-fake spy. The regulator sees the digital token transfer method as a "black box", low in accountability and virtually impossible under anti-money laundering rules anti-money laundering (AML) and anti-terror available. However, the flexibility may underlie the assessment: the built-in feature of crypto currency, especially Blockchain technology, has the potential to improve, not jeopardize, AML's efforts, even beyond existing mechanisms.
AML in Crypto-Industry
The escalating tensions between the rapidly growing crypto currency industry and AML guidelines are fueled by several factors, beyond Bitcoin's somewhat misguided reputation as a favorite of hackers and criminals, whose main structure is. The current AML system was originally designed to handle the existing centralized financial services system. By default, this guide can not explain the financial system based on intrinsic anonymity. In contrast, AML relies on the ability to monitor and exploit the Know Your Client (KYC) process, identifying information that each financial institution must account for.
The currently implemented AML monitoring mechanism links any transactions with legal entities that have been previously identified. The data tracked in the banknote line includes: (a) the entry point of the financial system, ie opening a bank account (b) any transaction in the system, for example sending money from one bank account to another bank account or using a fast platform. The system then monitors the financial activities, evaluates the risk of AML associated with such transactions, and follows up on relevant notices and reports. The use of financial results from a crime, if identified, can be easily linked to a particular person, and legal action is applied accordingly.
Critics of the crypto currency point to the lack of identification information across digital transactions as a major obstacle to AML's existing oversight and enforcement capabilities. However, all of these key regulatory and enforcement elements - identifying parties and information, transaction records and even enforcement - are all in the system crypto-currency. It's all a matter of perspective adjustment.
First, the crypto currency account for its user identity at the beginning and end of the transaction through a digital wallet. Tokens are stored in electronic wallets and not bank accounts. Only wallet owners have access to their wallets. Owners can send and receive tokens from one wallet to another purse by providing their wallet identification code to the other side of the transaction. The code itself acts as a key, eliminating the need for another name or type of identification. Thus, the transaction itself seems to be anonymous. However, in most countries today, one needs to go through the KYC process to open a new digital wallet. Therefore, based on having an electronic wallet, even without having to use it, anonymity is compromised. Even so, in some places, wallets can still be opened without proper identification processes, potentially allowing "dirty money" into the system. "Dirty money" and other issues such as coin-join and "smurfing", make it difficult to link financial transactions with certain legal entities, causing problems that still require solutions.
Blockchain can Reduce Risk
One possibility is the expansion of the KYC as a prerequisite worldwide for issuing global wallets by setting a set wallet standard, thus prohibiting transfer of tokens to purses that do not meet the same standards. Given that there is only one type of entry and exit point, unlike multiple exchange platforms available in the fiat system, crypto currency can improve the ability of identity tracking. Evidently, such specifications require consensus by key players in industry and free regulation. A recent increase in the new KYC requirements for new and existing wallet owners internationally suggests that such standardization may be important to ensure the functioning of the future crypto industry developed along with the introduction of state sovereignty.
In addition, thanks to blockchain technology, crypto currencies inherently have the potential to actually reduce the risk of AML when compared to fiat currencies. Blockchain is an online public ledger, in which each transaction is supervised, validated and recorded as a complete transaction history. Publishers of public ledgers and crypto miners are immediately notified of who transferred from one holder to another. Moreover, unlike hard counterfeit currencies, where governments spend considerable amounts of effort to fight, crypto currencies are almost impossible to forge because each carries their own unique characteristics, verified from end to end by miners. Without verification of all phases of the transaction, including the departure wallet, the destination wallet, the type and amount of currency, the transaction is blocked instantly without human supervision. In this case, the digital line could better serve the AML rule than the existing fiat paper footprint.
Blockchain structure is not the only characteristic of crypto-currency systems that benefit AML's efforts. Secret miners, who act as law enforcement factually, are also an integral part of the system. Miners oversee the implementation of the protocols attached to the blockchain code, and the vis-à-vis transaction validation solves the encryption algorithm. After validation is announced to the network, other miners "check for math", and one block is added to the ledger only if the required number of miners has verified the transaction. Similarly, the blockchain protocol can be revised to limit transactions to KYC-verified purses only. All transactions can be traced back to the identified electronic wallet. In addition, AML risk analysis and reporting and reporting mechanisms can be integrated within the crypto system,
As crypto currency gains the mainstream attention of the general public, and more individuals put their skins in the game, addressing the challenges of AML becomes very important. The core of the crypto system, the hallmark of blockchain technology offers a platform to deal with, if not overcome this challenge altogether. Evidently, there will be a price associated with a higher form of transaction costs and less anonymity. But this is a price worth paying for the purpose of allowing crypto-currency to go ahead and change the face of money as we know it. At the cost of global AML measures currently estimated at more than $ 10 billion per year, Israeli authorities and law and policy makers around the world will be cautious to look before they jump,