Today there are a number of factors that directly and indirectly indicate that the modern model of compliance does not fit well in a decentralized world. Almost all of the crypto currency exchange have a similar target audience. Users wishing to trade cryptocurrencies, usually was on several of them. Therefore, the information is duplicated in the same regulatory bodies. Such a model of interaction between users, stock exchanges and government agencies are cumbersome and complex. Can the crypto-industry propose a workable and effective alternative to the established system of compliance understand the material.
Why customers don’t like the current system?
Scheme showing the transmission of data to regulatory authorities.
This scheme works like this: Users visit the service sharing → sharing Service pays the service providers for completion of the preliminary checks → for creating reports to regulators (if required). All regulated service providers perform the same exact inspection.
Centralization in any form for quite some time is not applicable in decentralized systems. The currently system of identification does not allow the people to access financial services. Usually the timing of the review range from 24 hours to 2 weeks.
Also, now the access to personal information have a few counterparties, a priori, that automatically creates an additional vulnerability for criminals. Often people can not tell who may dispose of their data. Costs payment of fees for verification of already confirmed information provided by a number of counterparties also must be eliminated because of their irrelevance.
Who needs compliance?
To understand in what direction one should move to address emerging issues, it is necessary to understand what is a key compliance function. “Compliance, in whatever field or used in the broadest sense exists as an exceptional measure of the state represented by Supervisory authorities of the Executive power, aimed at the observance of the citizens and organizations of the legislation of the country. For business compliance is, on the one hand, the complex of measures for protection against external influences (e.g., external corruption), and on the other — from abuse (domestic corruption) and inefficient management of the organization by its management,” explained Director and co-founder trading-crypto.ru Alex Bytes.
Before we talk about decentralization and the use of technology a distributed registry, you need to understand what it needed in a particular area. “Of course, according to most users centralized cripture, the procedures related to verification of accounts and to comply with compliance, extremely long. Confirmation of the identity of the user lasts, as a rule, from 1 to 7 days (in some cases, the verification may not be implemented). However, it is a necessary process because without confirmation of the identity of the user, and the user, bear the risks, in cooperation with the tax police or in the case of misappropriation of funds or Commission of illegal transactions on the stock exchange on behalf of others. With the aim of reducing the risk there is compliance as a shield, by which, if you’re holding it right (in this case complied with), no claim to you will not have. In my opinion, it is better to take multiple times of verification on different centralized cryptomeria, install all sorts of ways to protect your account, because attackers can take control of your data, and do not have to wait. In a global sense, of course, in theory, criminals can steal personal information, if you make a purchase in the online store and this happens much more often statistically than the hacking of accounts for centralized cryptomeria,” said Bytev.
It is obvious that the centralized crypto currency exchange is not without drawbacks: the risk of loss of users due to, for example, failure of the equipment or hacker attack; the lack of transparency of the platform, the liquidity (large orders can be very long not to be fulfilled). “At such moments active users searching for a way out and see him in decentralized exchanges. Decentralized exchange, in contrast to the centralized, attracted by the simplicity of registration and further exchange of data. Compliance compliance at such venues as the protection of the crypto-asset customers from market manipulation, so as vague as the weather in London, because the risk of advancing some orders out of the queue is open: miners can view the transaction and “to promote” (in fact, it is nothing like market manipulation).
I believe that a fully decentralized exchanges almost non-existent, as some data, for example, the orders table should be stored on separate servers, and this is centralization, an exception may be the stock exchange where trades are carried out tokens based on the same system as the EPC 20. Compliance compliance is a process where a real problem with data duplication user exists, but its solution lies outside kryptomere. Data duplication is carried out almost wherever compliance is required, but you need to understand that for a user it is also a protection. Anonymity is good, before you become a victim of cybercrime, but this is the reverse of the medal”, — summed up Bytes.
Already the market can offer to solve problems?
There are no models that effectively address absolutely any issue of stock exchanges and their users, however there are several proto-variants, are able at least partially to make life easier in identification and security.
“Today, the whole legal and compliance are determined by the conditions and requirements of each of the participants in the process, especially if this process is associated with the transfer of ownership over some assets, whether Fiat or cryptocurrency. And model the transfer of values from everyone. For example, if we are talking about the operative legal entity in Switzerland with a Bank account in new York, whose client is a German, and a recipient of the service, for example, African, on each stage will have its own element legal and compliance requirements that are determined by the country in whose jurisdiction the operation is performed. This absolutely idiotic story, when it is handled at the level of state requirements to the legal person to a legal entity, conducting transactions, are not violated its own legislation. Legal and compliance is very often limited by its effects on the citizens of the region where we work, for example, the European Union and the requirements within their jurisdictions occur. These requirements are imposed by international agreement on the conduct of financial transactions. And it turns out pretty funny moment”, — said the founder of the professional community of crypto-entrepreneurs CryptoNet Dmitry Karpilovsky.
Within one service of one provider with one client we will have several different, often conflicting levels legal and compliance. When the money is to go across the border, we will have a second set legal and compliance. That is, the situation is very complicated. “Now imagine that the same service is provided by different companies around the world. Well, for example, we work with more than one stock exchange, and with several different. Two of them are in Europe, others in USA, the third — in offshore areas. Will be a completely different set of compliance, legal are totally different, but it will be 90% identical. That is, the requirements are reduced to checking the residence, to the observance of some points related to protection against money laundering. In fact, it will be legal chaos, which, however, has a very simple goal. But due to the fact that these requirements are very fragmentary and to some extent specific, work system, where there is no single database for compliance, no requirements for KYC, not one of the requirements for AML. That is, for decentralized of the world turns out to be unacceptable and inadequate situation,” — said the source.
Alternative there may be international agreements, but we are still infinitely far. At present, the only viable model is to create its data exchange Protocol. “For example, I like that now makes PayTomat. They have one core operating within the same jurisdiction that does not happen the final payments and outputs beyond legal and compliance of the same network, and each region connects the local provider with the full understanding and compliance legal their country. In Germany the provider is operating in accordance with German law, in the African Republic will be your representative with their laws and so on. It can solve not only the problem of level difference of legal and compliance, but also the challenge of managing the difference in the level of everything connected with bacchanal in the country. That is, for example, in a country where there is, in fact, no cryptocurrency legislation, everything will be solved through the resolution of the national Bank, and in Switzerland, where everything is spelled out much more clearly, it will be decided according to their laws. The EU legislation will be reformed in the Arab world — its history and so on. It is a decentralized Protocol, which is connected to the local legaly and complacency, and thus is a kind of unification,” — said Karpilovsky.
Another approach is what makes Telegram Telegram c Passport. “What do they do? They are completely moving away from the question of compliance to the question of attachment to the user’s ID documents. It is the Protocol of exchange of documents. A person establishes a proof of the registration, residence and other important documents. Once these data are fixed in Telegram Passport. Unified service any stock exchange may, with your permission, to access the documents and then make processing of this data. But the data they get is simple and straightforward Protocol. It does not solve the question of the conduct legal and compliance, but at least simplifies the process for the user, where previously it was necessary to include their documents in dozens of different places, and then keep track of who and how they work. Thus, at the moment I see only two such output. Any other solutions to the problems of the real world yet. There is only the utopian idea that everything will be distributed according to the principle of decentralized exchanges and no compliance will not be necessary, but it seems not yet implemented the project,” — shared his vision Karpilovsky.
And still no compliance anywhere
According to some crypto-enthusiasts, the compliance system is an integral part of the modern world, because it is a kind of guarantor of the preservation of assets for users. “Most of the really decentralized financial systems, in particular exchanges that do not have any coherent policy KYCAML, are characterized by low liquidity and a small number of participants. Accordingly, the compliance system they just don’t have”, — said CEO and co-founder of crypto-Bank Wirex Dmitry Nazarychev.
But do not forget (or ignore) the fact that the present popular decentralized financial systems, we just don’t have. “All of the examples we can give, will be centralized — largest cryptocurrency exchange, bitcoin-banks, services, p2p lending and so on. And here the choice for man: either to choose a company that will first conduct a full KYC with the relevant regulations adopted in one country or another, and the subsequent guarantees and commitments, or become a client of the company, being non-compliant with local or international legislation.
Almost any financial institution of the crypto industry can obtain e-money license from the regulator in Europe and become accountable. Currently in the world now has three companies with British e-money license, the most coveted and difficult to obtain: Coinbase, Circle, Wirex. This license allows any customer of these companies to apply to the FCA complaint, or any reasonable requirement, and the company will be responsible, with absolutely no need to be a citizen of the UK or one EU countries.
In General the world is moving towards a more dynamic and decentralized system of KYC/AML/compliance. But this process will take years, maybe decades, because requires the coordinated actions of the authorities at the international level. Until nothing else remains but to refer to the classical systems of traditional financial environment”, — concluded Nazarychev.