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ICOs and Know Your Customer (KYC) Compliance

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Initial Coin Offerings (ICOs) are a growing venture in the field of cryptocurrencies. Swiss Finma and US Treasury bodies have already introduce standards that will define the future of online transactions. Among these standards one is KYC, which before was established as a regulation for banking sector to fight fraud, money laundering and illicit activities. This is a new concept, especially for those who have engaged with ICOs mostly off the grid in the past.

ICOs compliance with Know Your Customer (KYC)

Expected to shape the future of the digital and the real-world identities combined, they are basically formed as a way of raising money to invest in another start-up/business venture. The key to fraud prevention is to allow the endorsers, who buy the tokens/coins from the newly introduced cryptocurrency, to verify themselves using ID checks online. One of the most successful ICOs is Ethereum that is climbing up the ladder of success, on the path to rule the crypto world.

Issues at hand

Online credit/debit card fraud poses the most imminent threat. Payment for crypto tokens is made through fiat money or in other cryptocurrencies. With fiat comes the issue of charge-back frauds. There are two scenarios for an ICO’s future:

  • The ICO gains enough money and launches their company/product successfully, all is good.
  • It happens so that the company launches but doesn’t generate enough revenue due to miscellaneous reasons.

In the 2nd case, investors paying through credit/debit cards claim their money back from the banks, saying the transaction took place without their knowledge, their card was stolen, or related reasons. Payment using bitcoin means it had to be bought from some platform too. Two major issues are associated with this include:

  1. Few platforms are available for Bitcoin purchase.
  2. Risk of chargeback frauds is looming when buying the bitcoin, as payment has to be made using credit/debit cards.

This incurs rather sizable losses to the ICO and/or the bitcoin trading forum.

Moreover, regulatory authorities in many countries have decided to take measures to end or limit the workings of ICOs, e.g. China, US SEC, Russia, Hong Kong, UK, etc. According to the SEC, ICOs should be strictly regulated because they involve blind investment, are not covered by federal securities law, and rarely have any requirements for investors (anyone can invest). The main issue that concerns them is the exponentially increasing fraud statistics attributed to the ICOs.

What can help?

These problems can be avoided if the ICOs perform e-KYC through digital identity verification on their investors, before selling them their crypto coins. Every problem, in one way or another, is linked to the next. Reduction of charge-back frauds will result in the elimination of blind investment. ICOs will know their customers enough to know they are authentic and able to invest in their venture.

In today’s day and age, widely available business verification services can help reduce fraud up to 75%.

For instance, Shufti Pro provides secure identity verification services that match the identity of the user to their legal documents, checks the truth of the documents, and verifies them in real-time. ICOs can avoid the risk of bankruptcy using Shufti Pro’s artificial and human intelligence based KYC solution. Knowing their customer would arm the ICOs with a proof of payment too, helping them grow their business with Shufti Pro’s complete security.