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

 

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:

  1. 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.
  2. 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!
  3. 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

Anti-money laundering regulations

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:

  1. 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.
  2. 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.
  3. 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 rest is up to you.

Gatecoin's interface

Founded in 2013, Gatecoin is a Hong Kong based cryptocurrency exchange that finds itself at #25 on BlockExplorer’s top 25 exchanges of 2017 list. Gatecoin offers a good number of trading pairs and an API for programmatic trading. Of the 90 trading pairs Gatecoin offers, there are both crypto/fiat and crypto/crypto offered, with the crypto/fiat pair’s fiat side being one of USD, EUR, or HKD.

Gatecoin has a respectable number of trading pairs and offers an API for programmatic trading. Which makes it a good choice for any traders located in Hong Kong, especially those looking to trade programmatically.

Gatecoin

gatecoin cryptoURL: gatecoin.com
Launched: 2013
Trading pairs: 60
Deposit Fees: Yes
Withdrawal Fees: Yes
Trading fees: Yes
Verification: Yes (Three levels)
Margin Trading: No

Fees and Limits

Fee wise, Gatecoin charges fees based on the trader’s volume over the last 31 days. Unlike some other exchanges, the 31 day period is a rolling one, meaning that you do not have to wait an entire period if you have significantly changed the volume of your trades. Fee levels are broken into the standard maker/taker distribution, where the taker pays a higher percentage than the maker. On the low end, 50BTC/31d, makers pay a fee of 0.25% and takers pay a fee of 0.35%. And on the high end, 20,000+BTC/31d, makers pay 0.02% and takers pay 0.1%. A complete breakdown of the trading fees charged can be found on Gatecoin’s fee page.

For deposit and withdrawal, Gatecoin only seems to charge fees for fiat. The fees paid depends on the transfer method, for example, there is a 1EUR deposit and 5EUR withdrawal fee for SEPA based deposits and withdrawals. The full list of fees can be found on Gatecoin’s transfer costs page.

Limit wise, accounts are limited based on their verification level. For crypto, you can transfer an unlimited amount as soon as you have completed tier 1 verification. And for fiat, tier 1 accounts are limited to $50,000USD or equivalent, which is upped to $100,000USD or equivalent for tier 2. There is no indicated timeframe for these limits.

Registration

Gatecoin’s registration method is a multi-step process that requires a decent amount of personal information. Registration cannot be completed without providing said information.

The first step is an email and password and is input from the normal registration form. Once you have completed the initial registration, you will be required to go through a further five steps on login. Each step requires some personal information from you. With the first step requiring your first and last name, your date of birth, and your current nationality. Following step 1, step 2 requires contact details, specifically, your address and phone number. Step three is simple and requires you to confirm an email address for your account. While step four is essentially verification for level 1, requiring a scanned copy of a photo ID and some proof of residence. And lastly, step five is a questionnaire asking for information regarding your source of funds.

Verification

Gatecoin has three verification tiers, where the first is no verification, the second is “verified”, and the third is “Certified”

Tier 2 verification requires a photo ID no older than ten years, and a proof of residence no older than three months, and a filled out ‘source of funds questionnaire’. Tier 2 is completed as a part of the initial account registration process.

“Certified” verification requires the same documents from Tier 2 to be mailed in as certified hard copies. Once the certified copies of the documents have been received, a video conference based verification takes place. During the Skype call, you will need to show your ID to prove that you are who you say you are. Alternatively, Hong Kong residents can have their documents certified at Gatecoin’s office.

Interface

Gatecoin’s interface is a bright white with two-toned blues for highlights, there is no dark mode offered. The bright background makes the interface difficult to use at night or in dark settings. The trading interface itself is well balanced, with a decent amount of information provided. As for the layout of the trading interface, it is split into four sections. The upper left section holds an order submission form. And on its right is the currently selected trading pair’s order book. On the lower half, there is a trade history on the left and a chart on the right. Along the top of the page is the pair selection dropdown, as well as a small overview of the current ask, bid, volume, high, low, and last trade for the currently selected pair.

Security

Account security wise, Gatecoin offers 2FA by means of Google Authenticator. Gatecoin offers a very granular account security configuration tool that allows you to specify what account actions will be logged via email, require confirmation via email, and require confirmation via 2FA. Granular controls are a welcome sight and make securing your account very easy. Gatecoin also states that all user funds are stored in per-user accounts on their side.

hand-coin

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 Bitcoin exchange, 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:

  1. Confirm your phone number You’ll enter a code the company sends to your mobile phone.
  2. Provide personal IDYou’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:

  1. 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.
  2. 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.
  3. 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.

 

Motivations for a Bitcoin ETF

As Bitcoin matures into a viable asset class investors demand easier ways to join the burgeoning market. Apart from retail interest, institutions have billions of dollars on the sidelines patiently waiting to enter the market.

The S-1 filing describes shares of the ETF to be “Easily Accessible and Cost Efficient.”  The Winklevoss Bitcoin Trust will allow investors to avoid the process of purchasing bitcoins on exchanges and having to handle security and storage. Shares would trade just like stocks, allowing mainstream investors to enter the market through an existing broker easily.

SEC Ruling: Winklevoss’ ETF Denied

Recently, the SEC denied The Winklevoss’ Bats BZX Exchange, Inc. (BZX) second ETF proposal. The Commission was careful to emphasize that the decision denying a Bitcoin ETF does not rest on evaluating whether or not bitcoin has inherent value.

Manipulation Still a Primary Concern

The SEC has yet to approve a digital currency-based ETF. In the latest decision, the SEC noted that more than 75% of the volume of bitcoin trading occurs outside the U.S., with only 5% of trading taking place on U.S. exchanges. Many overseas exchanges are unregulated, making markets susceptible to illegal market manipulation strategies such as wash trading.

SEC Commissioner Dissents

According to Commissioner Hester Peirce, the disapproval order focuses on the characteristics of the spot market for bitcoin, rather than on the ability of BZX to surveil trading of and to deter manipulation in their listed shares. Peirce noted if the disapproval order’s rigorous standard were applied consistently, many commodity-based ETFs would not pass.

Approval of this order would demonstrate the SEC’s commitment to acting within the scope of their limited role in regulating the securities markets. The disapproval denies investors from accessing Bitcoin through a predictable, transparent, and simplified product.

 100% Chance of a Bitcoin ETF

 The Winklevoss twins aren’t alone in the Bitcoin ETF space. On July 24th, the SEC delayed its decision on a separate Bitcoin ETF application from investment firm Direxion. Bitwise also filed its own application that would track an index of ten cryptocurrencies.

Jan van Eck, CEO of VanEck Associates is 100% certain the SEC will pass a Bitcoin ETF in the long run. The VanEck, Cboe, and SolidX partnership currently awaits SEC ruling on their proposed Bitcoin ETF. VanEck is hopeful of gaining approval addressing the SEC’s concerns here. Mark your calendars — the ruling is expected to occur between August 10th and 16th.

Conclusion

The disapproval order unintentionally undermines investor protection, precluding investors from benefiting from the increased institutional discipline that comes with approval. Bitcoin markets are steadily maturing, and mainstream finance is knocking at the door. Mass adoption is so close yet so far.

Handshake logo

The entire landscape of how we authenticate domain names likely will see a complete overhaul, all powered by blockchain technologies. Just released, Handshake brings with it the much needed security and reliability on which we rely. Backed by venture capitalists and industry-established blockchain developers, Handshake has raised $10.2 million to replace the current digital entities maintaining our current internet infrastructure.

The project and protocol has been led by Joseph Poon (creator of Bitcoin’s Lightning Network), Andrew Lee (CEO of Purse), Andrew Lee (founder of Private Internet Access or PIA) and Christopher Jeffrey (CTO of Purse). The effort also is backed by 67 individuals with funding coming from A16z, Founders Fund, Sequoia Capital, Greylock Partners, Polychain Capital and Draper Associates.

The Handshake project pledges to donate its initial funding of $10.2 million to FOSS projects, university research departments and more. The list of recipients includes projects and foundations such as the Apache Software Foundation, FreeBSD, Reproducible Builds, GNOME, FSF, SFC, Outreachy, ArchLinux, systemd and many more.

What Is Handshake?
Handshake aims to be a wholly democratic and decentralized certificate authority and naming system. Handshake does not replace the Domain Name System (DNS). It is, however, an alternative to today’s certificate authorities—that is, it uses a decentralized trust anchor to prove domain ownership. Although the primary goal of the project is to simplify and secure top-level domain registration while also making the root zone uncensorable, permissionless and free of gatekeepers.

A traditional root DNS supports the current infrastructure of the internet and, therefore, facilitates online access. The root servers hosting the internet publish root zone file contents, which are responsible for the internet’s DNS functionality. DNS associates information with domain names and maps them to public-facing IP addresses.

The way Handshake differs from this is that it’s all peer to peer. Every peer is responsible for validating and managing the root zone (via the use of “light clients”). All existing entries in the root zone file will form the genesis block of the blockchain supporting it. The same root zone will be distributed across the nodes forming the chain. The implementation allows for any participant to help host this distributed root zone and add to it.

How Does It Work?
Handshake makes use of a coin system for name registration (that is, the Handshake coin or HNS). It is the mechanism by which participants are able to transfer, register and update internet domain names. Currently, Handshake has opened a faucet to distribute HNS coins to qualified FOSS contributors. If you are one such contributor and you meet the project’s criteria, you can sign up here.

Once HNS coins have been distributed, the Handshake mainnet launches. A “mainnet” forms the central part of a blockchain. In fact, it is the blockchain in that it carries out the functionality of transferring digital currency from senders to recipients. This is the point where coin-holders can start auctioning, registering and transferring top-level domains.

With enough support and Non-Governmental Organization (NGO) cooperation, Handshake eventually will migrate to a more global distribution. Project governance and maintainability are and will continue to be community-driven.

To Learn More
You can find additional information on the official Handshake website: https://handshake.org. In addition, you can access all source code from the project’s GitHub page: https://github.com/handshake-org.