Over the past year, businesses have realised that Initial Coin Offerings (ICOs) is an effective new way to raise capital. In exchange for tokens, businesses receive funding in crypto coins such as ether and bitcoin. This mode of funding eliminates the intermediaries that linked investors to companies and have managed to raise billions for early-stage ventures.

Previously, ICOs operated in a regulatory vacuum but since 2017, countries including the US, EU, and South Korea decreed AMC/KYC laws to help regulate token sales, depending on the circumstances of the ICO. These enforcement actions made it a priority for companies to protect contributors and clients funds from any form of fraud.

What is AML?

Anti-Money Laundering (AML) is a due diligence process through which a company can confirm the identity of its clients. This is to ensure the background of the funds they wish to invest is legitimate, and that the client doesn’t belong to a terrorist, criminal or corrupt organisation.

Importance of AML Compliance

Regulators across the globe are now taking interest in ICOs and this has the potential to create uncertainty for cryptocurrency projects and investors. While national legislation sometimes is unclear or absent, complying with KYC/AML regulations has many benefits to both investors and the company. Some of the main advantages include:

  • Voluntary compliance offers a project and its participant’s legitimacy with regulators and financial institutions.
  • Cryptocurrency exchanges are now prohibiting cryptocurrencies that do not install KYC/AML processes. Not implementing such processes poses a long-term risk to a project.
  • Voluntary KYC/AML compliance may help ICOs access a wider global audience and increase the number of jurisdictions in which they can take part.

The Threat of Money Laundering and ICOs

The big question over ICOs concerns anti-money laundering (AML) and counter-terrorism financing regulations. The lack of record keeping in ICOs, the large amounts involved and the speed at which they can occur make them attractive money laundering conduits, especially for money gained from cybercrime. By swapping cryptocurrency for tokens, ICOs issuers could be redeeming cryptocurrency earned from illicit activity for new tokens which the users can sell for Euros, US Dollars, or other fiat currency Anti-Money Laundering/Know Your Customer (AML/KYC) legislation in relation to ICO projects help prevent unnecessary scrutiny from security and financial regulators.

Smart Contracts’ coding associated with AML may be the best way to interface between investors with genuine resources and illicit resources from illegal operations by requesting proof of identity that is digitised and stored in a database. This has the potential to affect the long-term prospects of the ICO community as anonymity is one of the benefits most online entrepreneurs gain from blockchain.

ICO projects that lack an AML application code embedded with the smart contract can discourage token buying, as investor confidence is low in such projects. Luckily, some of the main jurisdictions make KYC/AML compliance easier encouraging ICO activities in the long run. Terms of service are also useful tools that ICOs offer. This is because they’re reliable legal options pending when jurisdictional interest parties will release regulatory standards.

As mature startups and existing businesses continue to embrace ICOs, more organisations will comply voluntarily with AML/KYC directives as this will better their ICO potential, improve credibility with investors and banks, expand their reach, and offer clients better protection.

By Jeff Mwaura, Jeff is Kenyan based freelance writer with a focus on technology and finance.