In the past two years, ICOs or Initial Coin Offerings dominated as a means of investment and raising funds for a number of businesses. It presented itself as an attractive and innovative way for startups to raise capital for their new ventures. However, many of these ICOs turned out to be fake – 80 per cent according to one report. They may have generated billions in funds but the risk of financial crimes associated with them made many regulators sceptical about their legitimacy. Thus anti money laundering compliance became a necessity for ICOs.
One of the major reasons people and businesses became attracted to ICOs was its lack of regulation. Since the governmental bodies were unaware of its nature, there were little or no regulations were imposed on them. However, soon the SEC and other financial regulators realised that they need to be put in check and it was decided that tokens or coins may be subjected to the same laws as conventional securities.
The Risk of Money Laundering in ICOs
When the amount of fraudulent ICOs increased another potential risk that became associated with them was money laundering. An ICO allows startups to raise money without relinquishing control over their company; all they need to do is trade their exchange their existing coins and redeem them for tokens. Cryptocurrency tokens can be traded for other digital currencies or even liquidated to redeem cash for their value.
This anonymous yet fast way of trading, however, raises the risk of illicit activities, allowing for a number of scams and crimes to fester. For example, if a money launderer wishes to hide his/her money’s trace they can invest the proceeds of a crime in the form of tokens in an ICO thus claiming legitimate tokens. By the time any regulator or government is able to trace the illegal money, the criminal may have already liquidated his digital currency to claim his proceeds from the crime.
Thus the rate at which ICOs occur and their anonymous nature make them suspicious in the eyes of governments and financial regulators. They believe them to be an attractive way for cybercriminals and money launderers to get away with financial or other crimes.
The Regulation of ICOs
To counter this narrative, the crypto sector needs to adhere to anti money laundering regulations and come up with AML solutions for ICOs. As of last year, the US Department of Treasury has also blanketed ICOs and digital currencies under the umbrella of AML/CFT regulations. Such regulations require any company conducting an ICO to comply with certain requirements including registering with FinCEN and to enact effective AML compliance procedures. Furthermore, they are also required to maintain proper records of every transaction and verify their investors thoroughly with the help of Know Your Customer or KYC checks.
The increased number of regulations on ICOs have improved the confidence and trust of investors and regulators, thus lending legitimacy to the process of ICOs. The anti money laundering process has been fundamental in returning ICO to the forefront as an attractive means of investment.