What Uber and Bitcoin have in common
Model designed around customer experience
Products and services never work exactly as expected. Every person and business has gone through many changes over the past year, and those changes have had an impact on the financial industry as well. Society is built on trust and civil relationships (both individuals and businesses), but everything changes once participants have malicious intentions. These bad actors are at the origin of the sponsorship of weapons, drugs, corruption and cash practices. This is why the AML (Anti Money Laundering) and KYC (Know Your Customer) procedural regulations are so essential to maintaining the integrity of the company.
Role of the bank
The KYC is designed to be part of the identification process. While KYC processes help identify a specific person, they do not prevent malicious actions from taking place for accepted individuals. Therefore, procedures should also aim to monitor and prevent specific types of activity. Embily still wonders how can we best design these systems without going too deep into information that financial institutions shouldn’t have access to?
Every year, the AML restrictions become more and more stringent. Banks are willing to restrict cash flow unless there is a clear explanation of the source and purpose of the funds. While this is essential to prevent funds from illicit activity from being accepted by the bank, it also requires significant resources to maintain these programs. This can potentially prevent individuals from using funds that have been derived from it for legal purposes. This is why we have seen attempts by the wealthy and PEPs (politically exposed persons) to control various financial institutions in an attempt to circumvent these restrictions. The future is likely to bring even more restrictions imposed by regulatory agencies, which would be facilitated by advanced and automated surveillance systems.
Nobody is dissatisfied
Right now, many parties are happy with the status quo. Banks are overseen by government regulators, central banks target key indicators of GDP, and the IMF processes global asset distributions in SDRs. However, we must recognize that politics also plays an important role in every process. For example, in Venezuela, Russia, India – financial freedoms are nipped in the bud. Although there have been small innovations in the tools to create freedom for individuals and businesses, they were designed to be limited to small institutions with EMI licenses, and are still part of a system that has them. same restrictions as banks. This is a huge fault of the world economic system – political infiltration at all levels.
Cryptocurrencies were designed as a tool to achieve financial freedom for everyone. “Be your own bank” is a main concept of Bitcoin, but it is often seen as outside the acceptable practices of the traditional financial market. This is why it is essential that new businesses integrate KYC and AML practices.
AML for crypto assets is very difficult. Imagine that you are a financial institution and you have a particular customer receiving an inbound transfer that is above the thresholds set by your regulator. To facilitate the transaction, you will need to request specific documents such as bank statements (from another bank) or other relevant agreements. But even these documents wouldn’t necessarily be enough to prove the ultimate source of funds. It is clear that these traditional models still have many pitfalls and shortcomings that are very difficult to correct.
When Uber was just launched, everyone said, “Uber is breaking the traditional centralized market,” but what are we seeing right now? Countries are trying to restrict Uber’s operations, forcing local partnerships or exclusive rights in specific markets. For example, in Russia it’s Yandex. In Singapore, it’s Grab. Is this how the free market is supposed to work? The same problem exists with Airbnb – it’s designed as a trusted marketplace, but there are still cases of fraud and ways for locations to artificially improve ratings.
Decentralized platforms like Polkadot have their regulatory and fraud prevention frameworks built into the very foundation of their models. Imagine that! In this way, decentralized systems were designed to oppose traditional governments and financial institutions and create their systems promoting equality, equity and security.
Unlike traditional governments and financial institutions, P2P platforms are also able to adapt quickly and change when vulnerabilities are discovered. The best solution for new players does not lie in breaking existing systems but in integrating secure and ubiquitous global tools. Hopefully established institutions seek solutions in collaboration with innovators adopting new technologies instead of imposing endless layers of additional restrictions or attempting to ban these new and exciting developments.
Author: Eugene Khashin, Managing Partner at Embily Inc.