Know-Your-Customer (KYC) Requirements for Initial Coin Offerings

Abstract

Blockchain technology is often proposed as an infrastructure for decentralized Know-Your-Customer (KYC) verification, i.e., a process determining whether a customer is eligible for a given transaction. The benefit of using blockchain technology lies in the expected compliance costs reduction for companies by automatically enforcing KYC-requirements, whose results are accessible by multiple financial institutions. While information systems researchers have proposed conceptual models and prototypes of blockchain-based KYC-systems, they do not yet consider severe penalties that are applicable to companies if KYC-requirements are not met. Hence, if the legal requirements for KYC-processes cannot be met, these systems are not applicable. The paper uses an objective-centered design science research approach to develop a blockchain-based KYC-system for the conduct of ICOs that is compliant-by-design. To this end, the authors first identify existing KYC-requirements and define corresponding system design objectives that are used to develop a KYC-system that automatically enforces KYC-regulations, thereby preventing money laundering and other forms of identity fraud. Second, the authors contribute to the literature by providing a blueprint for compliant-by-design blockchain-based KYC-systems, in the paper, integrated into the investment flow of an ICO. Third, the authors propose a KYC-system that is applicable in the real world, by making – due to legal certainty – KYC-processes cost-effective, i.e., the proposed blockchain-based KYC-system expectably reduces compliance costs for customers and financial organizations.

Przeciwdziałanie praniu pieniędzy z wykorzystaniem walut wirtualnych

“…Europejscy legislatorzy zwracali uwagę, że niemożliwe jest objęcie rejestrem wszystkich transakcji z użyciem walut wirtualnych (Directive (EU) 2018/843). Niewątpliwie jednak brak możliwości monitorowania tych transakcji, hipotetycznie stwarza szerokie pole w zamian za emitowane przez pozyskujących fundusze tokeny, bez konieczności angażowania pośrednika finansowego (Ostern, Riedel, 2021).…”

Exploring the use of self-sovereign identity for event ticketing systems

“…Governmental authorities mostly take the role of the identity providers for these document types such as ID cards or driver’s licenses which provide a high level of assurance. Since official SSI-based identity documents are not yet widely available, a specialized KYC provider can also perform identity provisioning to ensure the availability of identity credentials (Ostern & Riedel, 2021 ). Thus, visitors can receive a VC after proving their identity to a KYC provider.…”

Meta-View of Blockchain Technology Tensions in Organizational Implementation and Use

“…Additionally, companies might face several regulatory issues depending on their accountability model, since blockchain's properties (e.g., the irreversibility of data on the blockchain) are conflicting with laws, such as the EU General Data Protection Regulation (GDPR) [52]. However, as scholars have identified ways to comply with regulations such as GDPR when offering blockchain-based applications [53,54], we see the major issue lying in the agreement of all parties participating in the blockchain to the accountability model and associated business risks.…”