Digital Currency Regulation: What You Should Know


Digital Currency Regulation: What You Should Know

Bitcoin companies operate in the finance world and are classified within the fintech definition. Financial technology businesses working with digital currency have to manage their enterprises accordingly, abiding by strict laws and heavy regulation. Most people don’t realize this because most of these services engage with its customer base in a frictionless manner. However, the industry is forced by many governments worldwide to be more invasive and collect a broad range of data because it deals with money.

Also read: Gavin Andresen: Developers Resisting On-Chain Solutions Are ‘Wrong.’

RegulationWhenever you buy cryptocurrencies from regulated exchanges, you should probably be aware of what they have to comply with when it comes to regulatory policy. Most Bitcoin businesses that buy and sell the digital currency must follow the rules their countries’ governments enforce. This includes the collection of certain data from marketing IPO’s and securities, Know Your Customer (KYC), and Anti-Money Laundering (AML) regulations. Understanding the requirements in your jurisdiction may give you an idea of just what you are dealing with when investing in digital currencies.     

What Is KYC/AML?

Bitcoin KYC AMLKYC requires businesses operating in the financial world to report the identity of its customer base. This means digital currency exchanges have to require their users to verify who they are with a legitimate form of legal identification. Most major exchanges like Coinbase and Circle keep tabs on the people using their services. These companies are required by law to collect identities. The use of KYC is said to prevent financial fraud, identity theft, and terrorist financing.

AML is another process of regulation concerning the profits made from illegal proceeds. Money laundering is the act of using this capital made from a crime and turning it into legitimate assets or currencies. Bitcoin companies who are buying and selling also have to comply with this policy. If a person was operating in this fashion and trying to “clean” their money, the service would be required by law to report this act.

Charlie Shrem of BitInstant is the perfect example of these two laws being used against an executive running a business. Shrem was sentenced to prison for being involved in money laundering that was associated with the Silk Road marketplace. In 2014, Shrem was arrested at JFK airport for the crime of laundering $1 million USD in bitcoins. Shrem said he did not knowingly handle the funds and plead guilty to reduced charges of aiding and abetting an unlicensed money transmission.

Data Collection

data-collectionMost of these laws and regulatory policies require some form of data collection. Many businesses take this practice more seriously than others. Tech giants like Google, Facebook, and Amazon collect quite a bit of data from its user base. The analysis of information gives these companies an edge on a consumer’s day-to-day activity so they can learn from it. These statistics give businesses an advantage by figuring out how to serve people best with their products.

This type of approach has recently gained the attention of financial institutions, and they also collect these customer details to better the banking process.

The extent of data taken from people online is not known to most people. However, it’s widely considered an invasive practice and looked down upon by the majority of citizens. Despite this opinion the age of information shows this practice is very common, especially in the fintech world.

ShapeShiftYet, certain Bitcoin businesses use what’s called Zero Knowledge and collect no data from its customer base. This isn’t a very traditional method by any means within the financial tech space, but in the cryptocurrency environment, it’s becoming a commonly used technique.

Last year, Erik Voorhees introduced Please Protect Consumers for crypto-companies to partner together and stop data collection. The basic data collection required by U.S. law caused Voorhees to cease’s services in the State of New York. Voorhees believed the infamous BitLicense created in the region had requirements of very invasive data collection procedures. These requirements involved reporting quite a bit of information about its customer base and companies it dealt with. The CEO of Shapeshift and a dozen other Bitcoin businesses left New York because of this license.

Research the Regulation Policies In Your Country

Financial technology is an interesting phenomenon, creating a frictionless environment that consumers now enjoy. However, many are unaware of the information used within these businesses. If you are using a well-known digital currency exchange, you are most likely subject to individual data collection. Governments use these laws in almost every country across the globe.

Bitcoin BannedThere are many rules concerning the use of digital currencies and lawmakers are just now applying regulation to them. At times, because regulatory approaches often fail to keep up with the rapid pace of technology, some people feel regulators stagnate the industry.

Just remember that businesses enabling you to purchase Bitcoin are required by law follow government regulation, and understand what these procedures entails. As digital currencies become more popular, authorities will define more rules in order to regulate them. Because some rules seem unfair to cryptocurrency, businesses may choose to cease operations in your region. Often times, they may be legitimately unable to comply with those regulations, forcing them to pull out due to costs and not politics. It’s good to research the local rules and find out just what you are dealing with when investing in financial technology.

How do you feel about the procedures FinTech companies must follow? Let us know in the comments below!

Tags in this story
Data Collection, Erik Voorhees, Fintech, KYC/AML, Shapeshift

Images courtesy of Shapeshift’s website, Shutterstock, and Pixbay

Jamie Redman

Jamie Redman is the News Lead at News and a financial tech journalist living in Florida. Redman has been an active member of the cryptocurrency community since 2011. He has a passion for Bitcoin, open-source code, and decentralized applications. Since September 2015, Redman has written more than 6,000 articles for News about the disruptive protocols emerging today.

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