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There's a Huge Opportunity for Everyone in Crypto, It's Called KYC/AML

Bruce Silcoff is the CEO of Shyft in Toronto, which is focused on developing blockchain-based solutions for digital identity and KYC/AML processes.

It’s easy to question the need for strict know-your-customer (KYC) and anti-money-laundering (AML) controls, as Edan Yago did in a recent CoinDesk op-ed.

Who likes the rising complexity and costs of compliance? Who gets excited about relinquishing control of personal data to set up a wallet, let alone access basic financial services?

The resulting data duplication across multiple centralized, siloed databases raises the risk profile for organizations large and small, stifling basic operations and thrilling and delighting no one.

KYC/AML is an easy target for critics like Yago, who also argue that these practices effectively amount to global surveillance, and therefore stand in direct contradiction to two of the most important aspects of cryptocurrency — privacy and disintermediation. Not only can KYC/AML infringe on a user’s right to privacy, we are told, but it can see sweeping “Big Brother” surveillance practices instituted. Over and out.

Should we do away with regulation then? Down with KYC/AML? Not so fast.

We’ve seen the alternative to no regulation firsthand, and what that means for blockchain companies. Silk Road aftershocks slowed down innovation and effectively de-legitimized the space for years, because blockchain came to be associated with criminal activity. Regulatory uncertainty meant that for years, early adopters took enormous personal and financial risks to pave the roads we get to travel on today.

Even more importantly, if none of us show up to sit at the table when it matters most – when the future of the ecosystem is at stake, because, no doubt, more regulations are coming – we will have only ourselves to blame if we don’t like the results.

A new privacy standard

It’s important to note that although KYC/AML processes and regulations can hinder privacy, that doesn’t mean that they must.

There is no reason that approaches more consistent with the fundamental principles of cryptocurrencies can’t be devised to satisfy KYC requirements without placing too much data in the hands of a central provider (or a handful of providers) who could abuse it, or open it up to abuse through a catastrophic breach.

In fact, KYC practices are fast becoming the gold standard for regulatory bodies looking to thwart money laundering in the cryptocurrency ecosystem.

It’s incumbent upon the cryptocurrency ecosystem to develop solutions that carry out these practices in a manner that doesn’t kill the technology’s promise.

Mass adoption

If our common goal is to advance mass adoption, blockchain and crypto companies should be prepared to work closely with the regulators and come up with new ways to solve big thorny problems. Simply put, we must build better technology.

Blockchain and strong cryptography enable multi-stakeholder use cases that simply weren’t technologically possible even a few years ago, and KYC/AML presents new exciting opportunities to revisit and uphold the original intent to curb bad actors and improve the protocol.

At present, the KYC/AML infrastructure mirrors guidelines implemented by centralized financial enterprises around the world. Just as traditional financial institutions require due diligence on prospective customers, cryptocurrency companies also rely on KYC/AML to collect personally identifiable information on individuals before allowing them to create new crypto wallets, do peer-to-peer lending, remit money across borders, or buy or sell crypto on an exchange. In the event a crime is committed, this information can be used to accurately pinpoint an offender and take appropriate action where necessary.

However, identity verification shouldn’t come with the risk of data compromise and extreme costs.

Through strong cryptography and through introducing decentralization into the current system and process, it’s possible to create protocol-level crypto rails to dramatically improve the handling of KYC/AML from the privacy and security perspective — all while reducing the cost of verification and clearing the barriers to mass adoption of cryptocurrencies and blockchain.

Financial inclusion

Once the costs are dramatically reduced, the upside of having strong and efficient KYC/AML regulations in place means more businesses will innovate and prosper. Progressive jurisdictions like Bermuda, Mauritius and Australia are already taking note and turning to the blockchain and crypto space for collaboration on legislation.

This levels the playing field for those billions of people without “legal ID” in a traditional sense, because new methods emerge to help assess people’s ability to repay loans, prove their credibility, transact and participate in the global economy. Traditional banking becomes a viable option then, as do the alternatives because there are new ways to transact and establish trust that don’t involve relinquishing full control of personal data. Finally, if the costs of KYC/AML compliance keep that global economic participation at bay, once that barrier is gone, imagine the freedom for innovators it would create.

This is why my team and other notable organizations are working to showcase the importance of KYC/AML and other important initiatives in the global cryptocurrency community — to prove, through tangible use cases, that it’s not preventing crypto innovation, it’s pioneering it.

Image via Unsplash.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Blockchain for IoT: A Big Idea Meets Hard Design Questions

One of the most ambitious ideas in blockchain is that the technology could enable not just people and businesses to transact with each other seamlessly, but also machines.

If this scenario, first articulated a few years ago, comes to pass, devices ranging from refrigerators to automobiles would not only collect and share data as part of the emerging internet of things (IoT), they would also be endowed with cryptocurrency wallets and unique, blockchain-based identities. 

The business possibilities from this physical internet of value are vast, potentially expanding the transactional economy in once-unimaginable ways. Self-driving cars might pay each other to cut ahead, for instance; a fridge equipped with sensors would know when it’s running low on milk and zap the grocer some crypto to deliver a fresh carton. 

But cut through the awe-inspiring visions and hype, and you’ll find debates now starting to take shape over nitty-gritty details.

Recent conversations with specialists at the intersection of blockchain and IoT reveal disagreements about the best ways to build various parts of the so-called machine economy, suggesting that at a minimum, the next phase will be full of trial-and-error.

As Carsten Stocker, CEO of Spherity, a startup specializing in blockchain and IoT integration, told CoinDesk:

“These systems require the integration of a variety of not yet mature hardware and software components as well as cryptographic methods and security processes. There are many hard choices to be made for IoT devices, some of which will stay in the field for decades, some of which our lives may depend on.”

Stepping back, one problem with IoT is that it’s a hopelessly broad category.

On one end of the spectrum are high-value devices such as cars, with their abundance of computing power and battery life. On the other end, we enter the low-power world of hundreds of millions of simple devices.

At each extreme, there is a unique set of difficult design questions that are now being confronted by those seeking to tie internet-connected devices to distributed ledgers.

In cars

But while the business and utility potential around cars in the IoT-blockchain world is tantalizing, the auto industry faces its own set of interesting business and design challenges.

For example, there is an emerging debate about where the “birth certificate” of a car, or its identity, should be located. Should it be the gearbox, where a lot of BMW’s and Mercedes’ intellectual property is concentrated? Or the engine? How about the hard drive that collates sensor data?

Alexander Koppel, CEO of Riddle & Code, a startup specializing in giving physical objects unique blockchain identities, said discussions have also been around the battery as a transactional component within a car. It charges and stores energy, and can start to hedge power and even sell it.

“The battery companies think they are the winners,” Koppel said, adding rather poetically:

“They think they will become the soul of the car.”

Meanwhile, Tobias Brenner, senior consultant at the Deloitte Blockchain Institute, thinks multiple wallets in cars is the intuitive solution, with the expectation of communication between the engine and the battery, and possibly also solar panels on the roof. Then there’s the in-car entertainment system which could have a wallet, and so on.  

“Multiple wallets within those systems may be a little bit more complicated but in the end would be very transparent, like which engine used what kind of power, for example,” Brenner said. “So, you have to balance it between the transparency and complexity of the whole system.”

Riddle & Code has been working with electric car battery makers to help secure this key piece of hardware (apparently such a battery has the explosive potential of a hand grenade so has to be secured against anybody hacking into it).

One thing is certain, Koppel said: “The innovation and business potential from making an object a wallet is phenomenal.”

On the edge

At the far-off edges of the IoT, where “things” tend to be very low-power and computationally simple, the argument is over how much complexity is helpful when integrating the network with a blockchain.

Some IoT experts, taking a practical view, think the only requirements at the end-points should be to deliver secure identity and no other complexity.  

Amir Haleem, CEO of Helium, which is building a decentralized network of wide-range wireless protocol gateways and a token to connect edge IoT devices, said adding complexity to end devices “is like a gigantic hurdle to people actually building things.”

Apart from anything else, there’s the cost.

“People get very sensitive about the bill of materials (BoM) when you start talking at a scale of millions or tens of millions,” said Haleem. “You start proposing like a 60 cent addition to a BoM and all of a sudden that’s a meaningful number.”

Haleem said it makes no sense for end devices, like sensors that track and monitor medicine or food supply chains, to actively participate in a blockchain because these have to be power-efficient and cheap in an IoT setting. But delivering strong identity in the form of hardware-secured keys is essential, particularly in the face of recurring widespread vulnerabilities, botnets etc.  

We move all the complexity up to the gateway, which is the device that creates the network coverage and acts as a node on the blockchain,” he said. “We try and keep the devices dumb and stupid effectively – and cheap.”

But not everyone sees it this way. Hewlett Packard Enterprise (HPE), for instance, recognizes that the majority of data is generated at the edge of the IoT world and says the goal should be to enrich those end devices in terms of computing power.

Christian Reichenbach, a transformation consultant at HPE, argues that a proliferation of IoT devices capture so much data that some computation and analysis has to take place there to sort through it all.

At last year’s HPE Discover event, Reichenbach was part of a team demonstrating how an iRobot vacuum cleaner with a Raspberry Pi could use crypto tokens it earned from cleaning rooms to pay a smart plug for energy when it needed to recharge – what HPE calls “the servitization of products.”

“We need computing at the edge to get intelligence out of all this data and then that can be transferred back to data centers or a blockchain,” said Reichenbach, concluding:

“Otherwise leaving these devices as dumb as they are today will just take up all our bandwidth with useless data.”

Internet of things image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Here's What's Standing in the Way of a Tokenized Economy

Dr. Pavel Kravchenko holds a PhD in technical sciences and is the founder of Distributed Lab.

In this opinion piece, the second of two parts, he describes the obstacles that must be overcome before blockchain technology can deliver on the promise of tokenization.

In my previous post, I described the potential benefits of tokenizing assets. Right now there are two major problems standing in the way of this transformation.

The first relates to the most obvious benefit: potential access to any asset for anyone in the world.

From a regulatory compliance point of view, the ability for anyone to open an account and then buy or sell an asset is a mess.

Let’s just take the example of EU banks that don’t deal with U.S. persons. As soon as they accept them as customers, they have to comply with U.S. regulations (regardless of jurisdiction) and that could be very painful since the U.S. has real power to punish any deviation from their rules. Therefore, the risks from having a U.S. customer are much bigger than the profits from them.

Obviously, the procedures for compliance and anti-money-laundering (AML) rules, and generally regulation on the whole, always depend on the specific jurisdiction, and may not necessarily meet the needs of the market.

There are a few tendencies, however, that will eventually make it possible to trade securities (tokenized assets will be mainly considered securities) globally.

Digital identity

First, this thorny issue will be resolved by unification of AML and know-your-customer procedures and supported by market leaders, as, for example, the U.S. Securities and Exchange Commission’s Howey test has become the de facto standard for determining when a token is a security.

Second, eventually developed countries will start using digital identities, as is necessary to automate KYC and AML procedures. The spread of digital identity solutions such as Estonia’s e-residency is already underway and it will positively influence the opportunities for tokenization, because digital passports are also capable of signing transactions. As soon as digital identity is used, all document flows can also become digital, which will significantly simplify compliance procedures.

Third, initiatives that create standards for information sharing and protection – such as BankID schemes in Sweden, Norway and the Ukraine and the EU’s PSD2 and GDPR regulations – amplify the need for changes at businesses.

Organizations at the very heart of the financial world, the banks, governments, card payment networks, have already woken up and, understanding the potential of a global market, are ready to discard many of the intermediaries and regulations that surrounded them on all sides.

We can see signs of movement towards that goal as banks are launching digital services, the European Commission is issuing directives to the financial sector based on the principle of open data and competition, and card networks are creating open APIs.

In the meantime, the question of KYC in tokenization can be resolved by limiting the circle of investors or use cases for which all processes can be digitized – for example, keeping them in a sandbox environment.

Standards missing

The second obstacle to tokenization is the lack of infrastructure and some standardized approaches to tokenization.

Very often people associate tokenization simply with the creation of a token on a public blockchain. But that’s just 10 percent of the whole process.

A public or private blockchain in itself only provides the function of storing information about the asset, with limited capacity to carry out transactions. Any complete tokenization system will include:

  • Managing the privileges of users and system administrators
  • Life-cycle management of an asset (issuance, withdrawal from circulation, etc.)
  • Security management
  • Integration of KYC and AML systems
  • Integration with payment gateways
  • Managing trading commissions and limits
  • Mobile and web apps
  • Exchange modules or integration with external exchanges

Moreover, there is a noticeable trend where each organization that manages assets seeks to create its own tokenization system, as in the case of real estate tokenization platforms that have been popping up. This makes sense, since it prevents centralization and allows different systems to compete for users.

Hence, it is likely that in the future each organization will own its own system – just like now every company has its own accounting and reporting systems. For that reason, the development of across-the-board technical standards for the design and versioning of a system and the creation of all its components is a critical factor for integration into business.

Properly documented technology makes it possible to use the same components of a platform repeatedly, increasing the reliability and the predictability of a system, mitigating risks in development and integration, and most importantly, reducing the time to bring a product to market.

Motivated to change

The good news is that there’s a strong impetus to build such linkages, even among incumbents that stand to be disrupted by a tokenized economy.

Businesses will drive changes in regulation and infrastructure, voting with their money, and finally the community will move to resolve higher-order problems – such as the interaction of various ecosystems, demonstrable security, joint asset management, mathematically provable settlement and auditing, and much more.

I strongly believe that tokenization will be the next big thing that will drive growth of world GDP and make entrepreneurs’ lives easier.

Everything that can be tokenized, will be tokenized.

Hurdles image via Shutterstock.

The leader in blockchain news, CoinDesk strives to offer an open platform for dialogue and discussion on all things blockchain by encouraging contributed articles. As such, the opinions expressed in this article are the author’s own and do not necessarily reflect the view of CoinDesk.

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SecureKey Taps IBM Blockchain for Digital Identity System Launch

Canadian startup SecureKey has revealed it will soon launch a blockchain-based system providing identity verification across the country.

Expected to go live in early 2018, the new digital identity platform utilizes IBM’s blockchain technology, enabling consumers to prove their identity using cellphones and Windows devices to governments, banks and telecom providers, said Greg Wolfond, CEO of SecureKey.

According to Bloomberg, Wolfond said the blockchain ID system enables consumers to control and share their personal information without going through centralized systems that create “honeypots” of valuable information that are vulnerable to hackers.

Wolfond added:

“This is transformational for identity. It makes it easier for me to prove it’s me and harder for the ‘bad guy’ to masquerade as me.”

Bloomberg said that Toronto-Dominion Bank, the Royal Bank of Canada, and a number of other major financial firms have invested $30 million Canadian dollars ($23.5 million) in the scheme.

The ID system was first announced back in in March 2017, where the company explained that the IBM Blockchain tech is built on top of the open-source Hyperledger Fabric v1.0 platform.

The new system “will help tackle the toughest challenges surrounding identity,” said Marie Wieck, general manager of IBM Blockchain, at the time.

Fingerprint image via Shutterstock

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Fintech means Blockchain? Is there anything else?

Blockchain technology is just about the first thing that comes to mind whenever a discussion centers on the topic of fintech innovations. The tendency to synonymize fintech with Blockchain isn’t entirely faulty, especially considering that even the World Economic Forum, in a 2016 report, said that Blockchain technology will fundamentally change the way financial institutions around the world operate.

While Blockchain technology is most likely going to alter the financial services landscape, it would be specious to attach the concept of fintech exclusively to Blockchain. Other technologies, artificial intelligence for instance, also have the potential to change financial services as we know them. This piece looks at a number of other innovations that are disrupting or can disrupt the financial services landscape.

Artificial Intelligence

Put simply, artificial intelligence has to do with the development of computer systems that can perform tasks that are usually performed by humans — in many cases more efficiently than the latter.

AIImage: cdn.pymnts

Financial services firms have been deploying artificial intelligence to improve the way they do business for a number of decades. Although it’s now mainstream, the first Automated Teller Machine, or ATM, only came around in the 1960s. Until then, the withdrawal process was entirely manual. I bring up this example to point out that artificial intelligence in the financial space isn’t a new concept. It’s been around for decades. I also want to point out that it’s the advancement of artificial intelligence that’s disrupting the financial space — just like it has disrupted it over the last few decades. That said, here’s how the advancement of artificial intelligence is currently disrupting the financial services landscape.

Deep learning. Deep learning is a subset of artificial intelligence. The concept of deep learning is quite complex, but we can think of it simply as a concept in which a computer system looks into datasets to learn patterns gradually and in the end, uses what it has learned to take, or not take action, or offer quick insights in presented situations.

These days, deep learning is being employed in the portfolio management space to obtain real-time transaction analysis for stronger portfolio management. Chipmaker NVIDIA also said that financial institutions have been investing in deep learning to manage risks and detect fraud through the analysis of large amounts and contrasting kinds of data. In addition, hedge funds have been investing to teach computers, through deep learning, how to imitate traders so they could perform trading activities, perhaps more efficiently, someday. Deep learning also holds significant promise in the insurance space ranging from customer experience, underwriting and even claims processing.

There’s machine learning, which you can think of as deep learning’s older cousin, that’s disrupting the financial services space. While employed in the insurance and banking industries, it’s most consumer-facing application has been in wealth management space, where it’s employed to build robo-advisors that help retail investors manage their portfolio. The businesses of wealth management startups Betterment and Wealthfront are partly based on robo-advisors.

Application Programming Interface

Application Programming Interface, or API, simply refers a set of routines and protocols for the building of software applications and it determines how software components interact.

The use of API to improve financial services delivery is being discussed within the industry. At the 2016 Apigee FinTech API Summit, experts pointed at the possible ways that the use of API would disrupt the financial services business.

Image: i.pinimg

The adoptions of APIs could help speed product design and delivery for financial institutions. Peter Wannemacher, an analyst at Forrester with specialization in digital strategy and the financial services industry, said the growing “mobile mindset” would pressurize financial institutions to up their game at identifying “mobile moments.” Mobile moments are ones that a mobile phone user pulls out their device to achieve a result. Considering that there is no one financial institution that can gather all information to truly identify mobile moments, Wannemacher predicted that APIs would be at the center of things.

API also presents an opportunity for institutions to share data with other institutions without exposing important operational secrets. Startup personal finance company SoFi’s adoption of Quovo’s wealth management API illustrates a good example of how API offers the opportunity for the unification of data, without necessarily having to share or merge operational systems. Quovo’s Authentication API allows SoFi to pull all of a customer’s information from their accounts to deliver better services.

Digital identity

One of the major obstacles for the complete digitization of finance is identity. The mainstream financial system can do almost nothing without establishing the identity of a customer or user, and that is a problem with fintech innovators. The majority of fintech innovators are looking to offer complete digital products, but identity challenges break the digital flow by forcing innovators to employ physical channels, such as photographs of drivers’ licenses. In essence, if we’re ever going to have purely digital offerings, there needs to be a simple but reliable means of establishing identity digitally. Blockchain technology has already been tipped to have the potential of solving identity issues in the digital world.

Image: secureidnews

So far, social media has been helpful in establishing digital identity, but many experts don’t deem social media foolproof. There’s been video-based identity management technologies, which take a few seconds video of a user and use algorithms to compare it to provided user photos. According to a 2016 World Economic Forum report, for fintech to actualize its full potential, there’s a need for more digital identity innovations.

Samsung has improved the digital identity conversation by patenting vein identification sensor smartwatches, which would read a user’s vein structure to help authenticate payments. The sensor could also detect pulse rate, which, like vein structure, is unique to individuals.

Bottom line

Regardless of how important Blockchain technology might be to the future of finance, we need to be realistic –  it cannot solve all challenges facing the financial services landscape alone. Different innovations need to be able to work together in other to achieve greater results. Blockchain is only a part of fintech and not a synonym for fintech.

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Cambridge Blockchain Joins Government-Backed DLT Group in Luxembourg

Digital identity startup Cambridge Blockchain is opening a new office in Paris.

The Massachusetts-based firm is setting up shop at at a startup campus founded by Partech Ventures, which invested in Cambridge Blockchain’s $2 million funding round earlier this year.

That the startup would move to establish a more solid presence in Europe is perhaps unsurprising. Cambridge Blockchain has looked to the financial sector as the primary market for its digital identity solutions, with a particular focus on Europe.

In May, Cambridge Blockchain announced that it was working with LuxTrust, a major digital identity firm backed by the government of Luxembourg, on a new blockchain-powered platform. That relationship with Luxembourg is deepening, as Cambridge Blockchain today said that it was joining the Infrachain initiative, a nonprofit group formed earlier this year by a number of companies with the backing of the country’s government.

Other members include LuxTrust and professional services firms KPMG and Deloitte, among others. With Cambridge Blockchain’s inclusion, that effort has now expanded beyond Luxembourg.

“Thanks to the support of Partech Ventures and Infrachain, we are positioned to tackle the banking industry’s greatest threat: the cost of regulatory compliance,” Matthew Commons, Cambridge Blockchain’s CEO, said in a statement.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Cambridge Blockchain.

Map image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at [email protected].