Topic: Do ICO's need KYC and AML checks or will that kill innovation? (Read 676 times)

I wanted to participate in an ICO, but couldn't because I live in the US, and I guess they didn't want to deal with all that. So it was horrible for me. It killed it for me.

Turnkey solutions are now coming

London, UK, 17th January 2018 – Leading digital identity verification provider, Jumio, has teamed up with smart cryptocurrency payments platform, Byteball, to support it in optimising “Know Your Customer” (KYC) processes for users taking part in Initial Coin Offerings (ICOs).

https://www.jumio.com/about/press-releases/byteball-ico-identity-layer/

That's the spirit of enterprise! I think in this crowded space with scores of projects launching daily and all of them vying for the attentions of a rather limited number of adopters, you have to remember how the earliest projects started: with a few people working diligently amongst like-minded individuals, all believing in something without any immediate gain. In fact, despite what people may think, a lot of the early developers of Bitcoin (and even ETH let's say) spent years on the ideas and building up the tech, and have little to show for it today except the recognition and experience. If they are to be believed (and I do take some of what they say at face value), not every early developer sat on mountains of crypto in the hopes that they would be fabulously rich.

Some of my largest holdings are coins which had no fundraising origins. Bitcoin is doing well of course, while others not so, but the belief has remained with the developers, and that has bought my belief (I want to say trust almost).

If you look at all the self-acclaimed angel investors and crypto billionaires, you'll find that none of them (my generalisation here) were programmers or developers. Simply people who bought up or mined coins.

Nevertheless, at least your project seems to have started from a desperate need, to enable Plutous as it is. And it may not be necessary to be a unicorn to provide something that is useful and beneficial... in my real life example, I continue to use the same free, open-source tools that may never gain the fame and recognition of bigger enterprises, but I am happy they remain relevant 20 years after I first used them.

I do sympathise with you because I'm a privacy advocate myself. It's a really difficult line to walk though, I think it has to be an individual decision for each ICO operator.

If it's an ICO that can exist entirely outside of the traditional banking system so it gets paid in crypto, stored its money in crypto, pays its staff and bills in crypto then there's less legal need to go the KYC/AML route. The problems really start when you have to work with traditional banks. Raise $10 million in BTC then try to deposit it to a bank so you can pay salaries and office space and you'll find the bank will want to know where the money came from and if it was investment then show AML and KYC compliance so they know it's clean money. Banks get punished if they don't check the source of money, just look at what happened to HSBC when they turned a blind eye in South America.

In our case we provide financial services which involves banks and other financial service companies providing specialised financial services so we have to interface with banks. We also have to pay the bills in non-crypto. For some other organisations it may be possible to live entirely in crypto, I hope that's a place we can all get to in time but for now its difficult for anyone planning to do something real with their ICO earnings. If someone is truly setting out to raise $100 million from an ICO without KYC or AML then it means they don't plan to bank any of it which likely means they don't plan to spend much of it doing what's in their plan which means they're probably planning to just sit on it and get rich, unless they live in a place where staff, offices, utilities and life can be paid for in crypto.

From the viewpoint of the new coin then I think it will actually be a good thing for innovation, it will likely limit the amount of rubbish ICOs because they have to be a serious project with a good team and procedure as well as financial backing to even consider launching an ICO. From the investors viewpoint it will certainly limit investment in a lot of projects for those people who cannot provide the required documentation.

There is no way this will not affect the amount of people who will invest in ICOs. I personally had an experience. There was this iCO I can't remember but I was interested in it so I checked it out. The moment I got to the site and realise the amount of information they were asking all in the name of KYCs, I just close the tab never to go back there again. The amount of information they were asking is not something I am comfortable to share on such site and I am sure a lot of people would also turn back because of that.

Good observations that I agree with. In our defence we’ve committed to building the OlympusBC blockchain whatever happens with funding since we need it for our main business platform and business plan which is Plutous. Plutous came first and was originally planned to run on Ethereum which would be the easier path for us to follow but because of reasons it became a problem using Ethereum which made OlympusBC necessary for us as a business.
It’s perhaps a bit of an unusual situation where we are developing a blockchain to enable us to do our business of Plutous but we believe others will have similar business requirements that makes OlympusBC a useful blockchain in its own right. OlympusBC was first discussed at the end of 2012 and started to take form more over the following years. If we can raise funding to support the development of OlympusBC then that would be far better than trying to develop the blockchain on a tight budget and extended timeline which is what has driven the ICO.

I think there are many reasons for ICO’s today, sadly most are just get rich quick schemes with no real business case or purpose. Hundreds of millions of dollars for a tweaked Bitcoin branch or a handful of smart contracts for some personal interest. Among them though are some great business plans and innovative smart contract based businesses or blcokchains. As with the .com boom, the challenge is to spot the unicorns because I have no doubt that we’ll have some major successes akin to PayPal, Amazon and Google.

I agree that many ICO’s don’t innovate but I think it’s unfair to say none do. Ethereum is a prime example, it raised over $18 million and Vitalik said he’d build Ethereum regardless of what happened with funding. Ethereum wasn’t easy engineering.

Today we seem to have three types of ICO.

Firstly, there are tweaks to Bitcoin. Tweaking properties isn’t innovative, it needs to be a substantial change before I’d consider it innovative.

Secondly there are smart contracts running on top of Ethereum. This is harder to classify since it depends on what the smart contracts do and how big a market it opens up. An algorithm can be very innovative, zip or jpg or SHA are examples of concise pieces of code that have a big impact. Facebook isn’t necessarily incredible engineering but it delivers big to investors and its users. As with the .com boom there are many organisations raising massive amounts for unsound business plans and projects that are less than innovative but there are some that are doing great work.

Thirdly there are entirely new blockchains which can be serious pieces of engineering and really innovative with new protocols, runtime environments, languages and much more. I’d argue that many of these are far far more innovative than most modern cloud businesses that have more in common with the Ethereum smart contract businesses that write something simple and leverage the power of the blockchain/cloud.

I believe it was inevitable. Crypto as we know it has far outstripped Bitcoin's very basic purpose as a digital P2P trustless currency. Much of the volume we see in crypto markets isn't P2P payments, they belong to exchange trading and other industries. At its height, online gambling took more than 50% of the share, and there's a growing amount of volume attributed to extra-finance industry, never mind venture capitalism through ICOs. The vulnerability to fraud, the shocks of Mt Gox led to knee-jerk reactions but also deep questionings of personal security or security of funds that identification would be necessary for.

As Atlast City sees, it's also a vehicle for credibility - something that crypto enthusiasts can't deny is still one of the biggest struggles of Bitcoin in terms of recognition and acceptance.

At the moment, though, I feel that most projects are only taking steps towards AML/KYC because of regulatory pressure. Reactive rather than progressive. And the motivation behind that is still, as Pursuer mentions, profit without belief in their own project.

you say "innovation" I ask you where is this innovation in the thousands of ICOs that have come out so far and have raised millions of dollars as funds for their "innovation"?

the reality is that no ICO has ever raised money to innovate, they raise money for doing some coding that any idiot with basic coding experience  could have done. those who really innovate don't ask for funds, they don't need funds. if I know I am creating something valuable I will get the first coins fair and square like anyone else can. I always give Satoshi as example and how he mined bitcoin aka his own project fair and like others.

all the developers these days that insist on a premine, or an ICO or any other kind of fund raising, they do not believe in their own projects so they want to get paid before other people join them in not believing in it.

I think it would be better for ICOs to use KYC from a regulative standpoint, however there is no doubt in my mind it will absolutely destroy the industry. Most companies will not or are not equipped to even do this to begin with, let alone how much extra work it is even if they are.

Well we had to take a lot of legal advice before starting our pre-ICO process and that advice has greatly changed our entire ICO process.

Our policy has always been for investors to provide the minimum amount of information necessary to invest and so our first process design was for investors to simply provide a username and password and with that they would be able to invest.

Then we took that to the lawyers and regulators and it quickly became apparent that it wouldn’t fly in the UK, Europe or USA. The reality is that regulation is really tightening up and ICO’s are going to be subject to increasingly strict legal requirements.

If a token is classed as a security then it will be strictly regulated. It doesn’t take much for a token to fall into the security category. Is the token sold on the understanding that it will make the investor profit? Then it’s a security. Is it being sold so that the investor has some rights such as governance or influence over how the blockchain runs? Then it’s a security. The only way to ensure a token doesn’t fall under securities law is to say that there’s no rights over the blockchain by the investor, no governance by the investor and the token isn’t being sold with any expectation or guarantee of profit. So as an investor you are paying for coins with no rights or expectations. Even all of this doesn’t preclude the ICO from risk, for belt and braces it should be targeted towards sophisticated or institutional investors rather than the person in the street. Regulators generally take the view that a sophisticated/professional investor with money to burn can do so at their own risk but everybody else needs protection.
What does this mean for an ICO? Well regulation is coming and quickly. Our legal advice has been that regulators can make those who run ICO’s return the money even if regulation comes after the ICO since regulation will just be a clarification of existing law applied to ICO’s. What if the money has already been spent? Well that’s bad news indeed for the people behind the ICO, the law is very strict in this area. So all the legal advice we received was to run an ICO as if it was an IPO. Don’t sell tokens with the suggestion of profit, don’t offer any rights, don’t do anything to place the token in the securities category. Then assume that regulators will still rule it a security and so put in place KYC/AML checks so when they come at you you’re already covered.
It will put some investors off who don’t want to go through AML and KYC checks but it will also attract some investors to welcome the extra level of professionalism and protection. It means regulators are highly unlikely to turn around in 6 months time and demand that money is returned, collapsing the ICO, likely losing money and perhaps even landing people in prison. The investment is safer and that is good for the token and the blockchain.
It doesn’t have to be a bad thing especially if investors who are not classified as sophisticated are limited to smaller investments, perhaps 1BTC in value or less. Smaller investments are not really the problem, it’s when someone can invest tend of thousands of dollars in an ICO expecting to make a profit or have some rights only to lose the lot.

My background is in software security and I believe with a passion in the ideals of blockchain and privacy. Blockchain and its benefits should be for everybody, it should be an enabler that levels the financial playing field for all. Anyone, anywhere should be able to use blockchains for payments and investments and the overall result should be fairer and more transparent societies and money systems. KYC and AML doesn’t sit easily with me because it can preclude many people from the benefits of an ICO. But there are a lot of scammy ICO’s out there and there are a lot of people risking money they don’t have and so there has to be some kind of protection. Perhaps this is something that could be tackled within blockchains themselves, perhaps it’s something we can work out as an industry. For now we’re stuck with regulation which is coming and very soon and will be as strict as in the wider securities market and it’s going to be messy for those who run ICO’s and investors and since it applies retrospectively as a clarification rather than something entirely new then it’s really a buyer beware market. We’re being overly cautious by going the AML/KYC route while still allowing smaller investments to be made without checks but it will be interesting to see what effect it has on whether investors invest or not.

In certain countries that's already becoming the norm. I think the huge ICO craze is what ended up changing everything. Without that, we'd still see these unregulated ICOs coming out all the time (which yeah, we still do see, but it would be even more so). Any country's government is going to want to tax these. It's just that simple.

If this happens once they requires document for an ICO where will the term decentralized be?
As one of the purpose of crypto currency that its users should regulate themselves by the use
of the block chain, what is the need of such checks?


It is everyone's responsibility to check and verify if they are joining the right ICO's.

I strongly believe that ICOs needs to be regulated heavily for the interest of their investors. If we look back and check all previous ICOs, we will see a lot of ICO did not turn up with their final product which they promised for and the investors are crying foul for having to loose their investment. This has to stop, otherwise the ICO market slowly become the scammers paradise and people will start avoiding investment in ICO. If their is a genuine ICO from a genuine company, they should not have a problem with the KYC norms at least. If their intention is good, they will proudly show it to the world. But if anyone is starting an ICO with the bad intention, they will not be willing to comply with the kyc requirements. It immediately put us on alert about them and we can safely avoid that scammer. ICO is already a very controversial way to raise money and it needs to be regulated for the sake of crypto currency reputation.

I'm interested in talking with you individually about KYC and AML.

We at Qchain, as a US-based startup focused on long-term growth and success, had to have very strict KYC/AML to comply with US regulations. Being honest, this really limited the scale of our ICO. However, we saw it as a necessary sacrifice to maintain continued operations in the US. The tradeoff is that it is easier to get venture capital funding in the US.

However, for the US, there is no minimum threshold by which KYC is necessary. Even if a transaction is under 1 BTC, you technically need to abide by KYC/AML regulations. If not, you might not get busted, but do so at your own risk.

You should always remeber that ICOs are alike with IPOs therefore it should be regulated and part of that regulation is the KYC and AML With this regulation we can stop  the trash icos and scam icos. Regulation will not be a big problem for the ICOs that are genuine and made to geberate profit.

I think its important that there be some kind of KYC/AML rules around ICOs but without the heavy requirements that regular markets require. It could be a very good way for startups to take their first steps and learn about the market before moving onto fiat exchanges if their growth can support it.

Based on my limited experience, it seems as if payment processors like paypal which are regulated and have KYC checks are less reliable than payment processors which lack KYC/regulation.

Coinbase could be a decent example of this. I don't remember hearing anything bad about coinbase until after they became regulated and implemented KYC. Now there are stories of coinbase witholding funds for months for no apparent reason. Funds being lost or confiscated. I can't vouch for whether these stories are true. But the timing does seem suspicious.

I would be interested to know if others have similar impressions about KYC/regulated payment processors / exchanges being less reliable with checks and regulation in place.

Even if most of the countries will regulate ICO's it won't stop them, because they are unstoppable just like the cryptocurrency itself. Sure there's a problem that most ICO's are scams, but it's a very valuable element of decentralized economy, and it's the duty of crypto community to expose scams and keep it safe for newbies.
But those proposed AML and KYC checks seems rather odd, because instead of targeting ICO runners to make sure that they at least won't vanish as soon as their ICO is over, they target investors who are not in position to do any harm. Laundering money through ICO without any cooperation with its owners seems very risky and there are much better ways to do it.