Beer says bth technology will help them “simplify payment processing and store customer information.” She also cites its potential to strengthen Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) rules when sending money between banks.
Building on Ethereum
JP Morgan is experimenting in Ethereum, having launched Quorum earlier this year to facilitate the use of smart contracts.
“We invented a blockchain in open source Ethereum, the existing blockchain technology had not solved the issue of privacy and scalability that we needed.”
As a bank dealing with millions of transactions every day, JP Morgan will likely need a blockchain solution that can handle high transaction speeds.
Is blockchain the future for JP Morgan?
Beer was extremely bullish on the technology, explaining that it’s not just about cost reduction. She said they’re also looking for “opportunities for the development of new products.”
The long-term goal is a complete overhaul of the system:
“In a few years, blockchain will replace the existing technology.”
What about buying and trading cryptocurrencies?
Although Beer was evangelical about blockchain technology, she was more cautious on the subject of trading.
She said they have “specialists evaluating what is happening” and they’ll only support regulated activity.
It seems JP Morgan is taking the same ‘watch-and-wait’ approach as other banks on Wall Street.
84% of companies are “actively involved” in blockchain
According to a new PwC survey, it appears JP Morgan are not alone. The vast majority of companies are jumping on the blockchain bandwagon.
We’ve heard it hundreds of times. Blockchain is Web 3.0 or Geekdom’s latest marvel. Entrepreneurs, or business owners, who capitalize on this technology when young make it rich. Innovators like Ripple turned a $10,000 investment into $1.5 million in five years. Binance, only a year old, has a market cap of $840.8 million, according to Coinmarketcap. So it’s understandable that you’d speculate about launching your own business blockchain. You may not want to innovate anything, but, hey, blockchain’s said to be the next Revolution. Blockchain fanatics say it’s a core differentiator and value driver, leading you, if you have a business, to quite likely think maybe you should jump on board.
Brian Winker’s take on blockchain for business
Sometime last year, I interviewed Brian Winkers, founder of blockchain money automation company bitlov.com that won first place in the 2015 StartUp Chile! Competition.
Winkers himself is an open-source developer and Bitcoin analyst who has been playing around with crypto projects since 2012 and has helped small and medium-sized businesses get on or, rather, more often, off the blockchain.
For Winkers, blockchain for small business is a bonkers idea, largely because of Bitcoin. Bitcoin’s platform has problems with scalability: The platform is slow – around ten transactions per second compared to Visa’s 5,000 to 8,000 transactions in the same time span. The ledger became congested. The company itself struggles with internal squabbling.
Truth is Bitcoin is competing with more scalable and less problematic platforms like Ethereum and IOTA, so businesses can profit from blockchain more than was possible, say, ten years ago.
The problem is the expense.
Blockchain technology is free if you want to do all the work. The problem is recruiting a blockchain developer, and that’s where the trouble starts. As of 2018, a decent blockchain developer costs anywhere from $150,000 to $200,000 at the very least. Forget the fly-by-night freelancer from a platform like Elance, Guru or the like. Actually employing someone from such a platform would likely cost you more, since you may have to pay for errors. Any coding error or slight mishap means the ledger needs to be dismantled and rebuilt from scratch, aside from which technological changes occur so rapidly that top blockchain developers regularly familiarize themselves with updates.
Want a top developer? Expect to pay $250,000-$450,000 for a whiz, or triple that for a world-class specialist, according to Pavel Supronov on Medium. You think blockchain saves you money? According to John Levine, crypto consultant, author, and speaker, blockchain is the most expensive database ever invented.
Is your blockchain for innovation?
To get some ROI from your blockchain investment, you need some really BIG idea that’s stupendously different than competitors and that delights hordes of people. (Think of a Ripple or Binance). Such a feat, according to Winkers, is performed by only two out of every hundred ICOs or startups.
“In all my years,” Winkers told me, “I’ve only found one ICO that makes sense, and that’s the one I’m with right now. A Russian company called Visor looking to create a payment coin. I’m providing some technical guidance, more on the architecture side. I think they have a good team that understands the need to meet the underlying business needs. It’s not about them having a big payday.”
I regularly tell businesses not to proceed with Bitcoin, but to focus on more conventional solutions. I try to help them customize their business, figure out what they can do. Unfortunately, most people who approach me are dazzled by Bitcoin and the ledger. They don’t understand it… but just about everyone’s doing it so they want on the bandwagon. Now if they’d have a wonderful remarkable useful idea that may be one thing, but they often emerge with impractical, unfeasible ‘solutions’, so it’s a waste of their time and money.
At the end of the day, if your mind is on blockchain for fame or money, Winkers doubts you’ll succeed. You’ll want to have a solid idea that makes sense and that lasts for decades.
Blockchain to save you money?
How about if you don’t want to innovate but are sold by the blockchain hype and want blockchain to expedite your business? Say, you’ve read reports like that by management consulting giant Accenture and McLagan who insisted that blockchain promises cost savings of 70 percent or more in finance areas? Or you read the 2014 EY report how blockchain-based businesses outpace competitors?
Well, blockchains have certain problems that you’d want to know about…
The National Institute of Standards and Technology (NIST) – a non-regulatory agency of the U.S. Department of Commerce – recently released a report for beginners to blockchain and business owners often tempted by new technology.
The report pointed out that blockchain can’t control users’ conduct. The NIST also highlighted the misconception that blockchain is “trustless” – you need a great deal of trust in the technology, developers, and user cooperation for the blockchain to function. Further, users must manage their own private keys that, once lost, are harder to recover than usernames or passwords on centralized platforms.
Additionally, blockchains are massively inefficient. Set up a blockchain and you’ll need each and every user to archive, and constantly update, a complete history of all that’s happened on that blockchain.
Finally, but not conclusively, blockchains also require a computational challenge to restrict the creation of new blocks. If it’s too easy, hackers could temporarily mobilize enough computing power to rewrite history; if it’s too hard, each new block will consume megawatts of electricity. And electricity for blockchain costs hundreds, if not thousands, of dollars.
On the other hand…
As we speak, blockchain improves all the time. More modern technologies produce decentralized platforms that have more bandwidth, are faster, more convenient, easier to program. IOTA, for example, uses a “blockchain” that isn’t the traditional format but a new one called Tangle that knocks out the expense and time of mining. IOTA transactions are super-fast and process several transactions simultaneously. Its structure perfectly suits the Internet of Things (IoT), where products and appliances like cars, home appliances and machinery “tangle”. Businesses on “next generation” blockchains like IOTA report a smooth, fast and cheap experience that almost resembles that of the Web.
So to blockchain or not to blockchain?
A unanimous decision tree floating the Web may resolve your problem.
Ask yourself the following:
If you need a database, are all the writers or participants on your team known and trusted? Is there anything you need to hide? Do you need to hire, or involve, trusted third parties? Do you need to control functionality? Are your transactions private? If your answers are a flat “no” to each of these questions, either stick to a standard database or use a public blockchain.
Does more than one participant need to be able to update the data? Do you need to hire third-parties whom you’re unsure whether you can trust? Do you have any confidential data? Do you and all the updates on your team barely know one another or have some qualms of one or more users? If you answered “yes” to one or more of these questions, use a permissioned or hybrid blockchain.
Does the data need to be kept private? Do you need to control who can make changes to the blockchain software? Do you have the money for blockchain programming and continuous maintenance and upgrades? Consider a private blockchain.
Even then Winkers would tell you to mull your decisions carefully.
“I’ve always worked to make sure that small businesses aren’t taken advantage of by others in the technical fields,” he told me, “And that includes blockchain. For some it’s the right path, for others, it’s a costly diversion.”
“ICO companies that invest in blockchain have a 98% failure rate. That’s not the route,” Brian insisted, ”that I’d want to take.”
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About three years ago, a so-called crypto-anarchist, deep into libertarianism, hired me to write a book that included content railing against government anti-money laundering regulations. As he saw it, there is essentially nothing wrong with financially supporting terrorist organizations, smuggling drugs or other contraband items. (Hell, there was nothing wrong with terrorism to him; one man’s terrorist is another man’s freedom fighter). People can do what they want as long as they don’t harm others. Drugs and prostitutes (for instance) delight individuals. And, therefore, the government, which, by the way, does a lousy job of literally minding its own business should focus on “minding its own business”.
Five years later and knowing more on money laundering, I think large-scale smuggling and certainly funding terrorists may have more negative social and economic ramifications than my well-meaning friend opined. This is partly because unrequited criminal laundering turns us into a criminal society – after all why work ethically when we can make far more money in illicit activities. Above all, successful money laundering means more drugs on the streets, more drug-related crime, more fraud, more corporate embezzling, and more terrorism, among a host of other social ills.
What is money laundering?
Money laundering, at its simplest, is the act of trying to make money that comes from nefarious Source A look like it comes from “clean” Source B. If caught, the perpetrator can’t use that money, since law enforcement would seize it. Source A involves funding ISIS, smuggling cocaine, engaging in corrupt political businesses, or benefiting from fraudulent business schemes, as examples.
If I were involved in any of these activities and would want to retain my stash, I’d be advised to go through the following three steps:
Placement – Find a place to stash my money. If I wire the trove to my banks Capital One or Charles Schwab, they’d have to tell the government I’m suddenly depositing millions in checks. So I need to find a resilient hiding place.
Layering – Money launderers can teach me all sort of schemes like wiring money between different accounts in different names in different countries, or purchasing high-value items (boats, houses, cars, diamonds) to change the form of my money. I can also change my money’s currency – and this is where cryptocurrency comes in. So, I can change my dirty dollars into Bitcoin and then again into Monero or Dash to better hide its source – now there’s a way to evade the cops!
Integration – At this point, my money re-enters mainstream society as though it comes from a legitimate source. I’ve strategized in such a way that my startling fortune is innocuous and can slip under the radar.
The government’s response to money-laundering
In the United States, the Department of Justice, the State Department, the Federal Bureau of Investigation, the Internal Revenue Service and the Drug Enforcement Agency join forces in catching money-launderers like me. State and local police investigate cases under their jurisdiction. On the international stage (and when it comes to blockchain), organizations like the United Nations, the World Bank, the International Monetary Fund and the Financial Action Task Force on Money Laundering (FATF) send in their troops. The last has 33 member states and organizations, as of 2018.
Cops combine legislation with law enforcement. In the United States, legislative acts include:
The Bank Secrecy Act (1970) – Financial institutions have to report all single transactions above $10,000 and multiple transactions totaling more than $10,000 to or from a single account in one day. When it comes to the blockchain industry, this includes money service businesses (MSB), too. Bankers who violate this rule can serve up to 10 years in prison.
The 1986 Money Laundering Control Act – Any aspect of money laundering is a crime punishable by fines or jail.
The 1994 Money Laundering Suppression Act – Banks have to establish their own money-laundering task forces to weed out suspicious activity in their institutions. When it comes to blockchain-based financial institutions, customer due diligence (CDD) rules are no different.
In truth, it’s a perpetual chase of cops vs. robbers, with the robbers mostly slipping through even as cops set the traps.
How do AML rules impact ICOs?
ICOs, also known as token sales, can fall foul of anti-money laundering regulations with their digital tokens. While “utility tokens” that only give investors access to the startup’s features are ok, it is the “security tokens” that may offer investors equity or some form of an investment return that are problematic.
This is where a growing number of ICOs interest themselves in Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations for reasons that include the following:
Establish credibility with banks – After all, banks don’t want to trip up with organizations like FinCen, a bureau of the U.S. Department of the Treasury, that snoops into whether financial institutions are adhering to KYC.
Long-term legitimacy – It’s good for your bottom line. You don’t want the government to bust your booty as happened in 2014 with Mt. Gox, the largest Bitcoin exchange, after the US Department of Homeland Security (DHS) seized suspicious money from its U.S. subsidiary account.
Improved public perception – You appear more legitimate. You’re more likely to interest investors. The Dutch Authority for the Financial Markets (AFM), for one, warns consumers to avoid ICOs:
“Due to their unregulated status and the anonymous nature of the transactions involved, ICOs are attractive for the laundering of money obtained by criminal means. .. Because of these risks, there is a strong possibility that investors will lose their entire investment.”
With your compliance to KYC/ AML rules, you prove the AFM wrong.
4. Expanded reach – You’re more likely to attract investors in countries with rigid KYC/AML regulations like US, UK and Canada.
5. Avoid Regulatory Fines – There have been cases of regulatory bodies fining or suffocating ICOs that smell suspicious. With the Mt. Gox case, more than 3,000 customers lost some, or all, of their investments. You really don’t want that happening to you! AML in practice?
Our most recent guide to all there’s to “KYC: A Practical Guide for Blockchain Entrepreneur and Investor” gives you the overall picture.
Really, it reduces to three steps:
Identify and do background checks on depositors.
Report all suspicious activity. (For example, if a background check revealed that depositor A works in an oil rig, and he deposits $2,000 every two weeks, a series of ten $9,000 deposits over two weeks should worry you.)
Build an internal task-force to identify laundering clues.
The process of ‘Know Your Customer’ (KYC) is simple. Say you want to invest in an ICO, you may be particularly anxious that no organizations or individuals connected with or funding criminals and terrorists share the platform with you. KYC also refers to parties involved in other anti-government activities like money-laundering, smuggling, or coming from countries under sanctions. Even if you don’t care, the government does.
There have been stories where funds have been frozen or confiscated while the government inspected the company’s transactions. In 2014 for instance, more than 3,000 customers lost some, or all, of their investments in Mt. Gox, the largest Bitcoinexchange, after the US Department of Homeland Security (DHS) seized money from its U.S. subsidiary account.
I assure you, most token buyers would rather go through the quasi-onerous motions of KYC than have their crypto booty confiscated!
In a similar way, if you’re thinking of running a cryptocurrency exchange, a cryptocurrency ATM, or an ICO, you’d like people who participate in your token sales and incoming funds to be “clean”. Either way, FinCen, a bureau of the U.S. Department of the Treasury, requires ICOs to adopt KYC regulations. Finally, if you’re a money service business (MSB), you’d certainly want KYC to be your rule since banks, large corporations, and public bodies are all KYC-crazy.
As a client, this is what KYC means
Most credible bitcoin exchanges like Bitstamp, Coinbase, or Kraken will ask you to do the following:
Confirm your phone number – You’ll enter a code the company sends to your mobile phone.
Provide personal ID – You’ll likely need to attach one or more of the following: a scan of your ID or driver’s license, a recent utility bill, and/ or a copy of your birth certificate or passport. The types of required ID documents depend on the bitcoin exchange and on the amount you want to trade, with larger amounts requiring stricter verification.
Expect a growing number of ICOs, particularly those that are MSBs, to ask you for some of those documents, too.
Most major platforms verify your identification within one to three hours. Slower businesses may take up to a week.
As a business owner, here’s what KYC means
The process is simple:
Establish customer identity – Collect basic identity documents or data like the following: IP address, name and address validation, citizenship, birth date, a photo of government issued ID (Driver’s License, passport, ID card), Social Security number or Tax Identification, bank statement, recent utility bill.
Understand the nature of the customer’s activities (to satisfy yourself that the source of their funds is legitimate) – Check that they’re allowed to take part in a token sale (e.g., they are not on a sanctions list). IdentityMind Global, a service that offers risk management and anti-fraud services for e-commerce platforms, deals with this problem by comparing a selfie of the individual to the picture in the government issued ID.
Monitor the customer’s activities – As of January 1, 2017, The New York Department of Financial Services (NYDFS) required an ongoing monitoring program that includes checking that the client’s financial transactions and accounts match their risk profile.
Some concerns are that individuals from sanctioned countries could hide their location and buy tokens from US companies. IdentityMind prevents this by looking at the IP address and determining, first, if the prospective clients uses a proxy (and if so, which kind), and, second, if it employs the Tor network or a VPN. If either is used, the application is denied. When it comes to money laundering, IdentityMind imposes EDD for contributors over a certain dollar amount.
EDD: Advanced KYC
There are three tiers of due diligence:
Simplified Due Diligence (“SDD”) – Situations where the risk for money laundering or terrorist funding is low, and you only need a partial KYC.
Basic Customer Due Diligence (“CDD”) – Information obtained for all customers to verify the identity of a customer and assess the risks associated with that customer. Here’s where you’ll need the complete KYC.
Enhanced Due Diligence (“EDD”) – Additional information collected for higher-risk customers to avoid possible risks.
Since this sounds like a lot of work and you have enough on your plate, some ICOs, or blockchain companies, dispatch identifications to third-party KYC providers, who, in turn, send documents to call centers around the world where clerks review information. Other blockchain companies, like data marketplace Datum, seek more confidentiality for their clients and review the data themselves.
Dealing with upset customers
Admittedly, KYC frazzles some people’s moods. Crypto enthusiasts, for instance, tend to disagree with the government’s “interference” ideologically, on the grounds that cryptocurrency should be anonymous, or at least, pseudo-anonymous. Others find the KYC requirements irksome and intrusive.
To modify such customers, you may want to make your requirements clear ahead of time, show how KYC protects investors, and that even if they disagree – “Sorry, guy, but we need this information to comply with FinCen’s Know your Customer requirements.”
After all, know thy client saves you and your customers oodles of stress and money.