Shifting Crypto Regulations Spotlight Need For ID Verification

In a bid to bring better transparency to corporate actions — and reduce fraud — in the digital age, the regulatory landscape is shifting.

For example, late last year, the U.S. Senate passed legislation, the Corporate Transparency Act, which strengthens anti-money laundering (AML) rules. The legislation also bans anonymous shell companies. At a high level, in terms of company disclosure, the legislation mandates that firms report their beneficial owners to regulators and have more robust information sharing between regulators. The legislation broadens the Financial Crimes Enforcement Network (FinCen) to punish firms that skirt those regulations.

To address the changes, Zac Cohen, chief operating officer at Trulioo, told PYMNTS that firms across many verticals, including in the cryptocurrency space, will need to get ready for more stringent rules governing disclosure of their who’s who, who owns what, and where they are.

He said the Senate legislation “shifts the burden of collecting a database of information on corporations — as well as shifting the ownership of such a robust database — to FinCen.”

The construction of that database, naturally, leads to consideration of identity itself and how a robust set of protocols to help establish and ascertain identity can be built into that database. What we’re seeing now in the U.S. is not all that different, maintained Cohen, from what we’ve seen in Europe, where there has been a strong drive and motivation to improve AML screening and to improve transparency into corporate architecture, hierarchies and ownership models.

Thus far, he said, in the U.S. we’ve mostly seen a scattered landscape of government databases — scattered, siloed and located in different states.

Tackling The Big Questions Around Identity 

Now, with the Corporate Transparency Act, said Cohen, the large questions loom: “How are we supposed to create a system that is transparent and that protects against bad actors if we don’t even have accurate data being standardized by a single organization? And by forcing participants to submit that information so that it can be used for a very important use case — validating that a legal entity actually exists? And who is responsible for those entities’ actions?”

Drilling down a bit, he said the issue is a pressing one, tied to beneficial ownership (defined as stakes in a firm of 25 percent or more, held directly or indirectly). Highlighting BOs, as they are commonly called, focuses on just who controls the legal vehicle, who should be held responsible for the decisions and ultimately the actions the legal entity/corporation takes.

Those considerations are especially important as cryptocurrencies take root across the globe because one of the selling points of cryptocurrencies has been their relative anonymity.

The potential regulations around beneficial ownership could remove that anonymity factor. Bringing the new mandates to bear across financial services (and by extension, cryptos), said Cohen, “is a definitive shift and a definitive signal of where, from a regulatory standpoint, the industry is going.”

Cohen was quick to point out that cryptocurrencies, like so many areas of financial services, are complex and diverse. But regulators are looking to start with at least some common standards, with the acknowledgment that there will be exceptions and different use cases.

“They have to start somewhere,” he told PYMNTS. Right now, “what we need to do is recognize the power of the technology on the blockchain and crypto side, the identity verification side, as well as the use case side, and bring them all together so that we can have better alignment to satisfy the ultimate goals.”

Yet, as PYMNTS has found, 47 percent of senior decision-makers have some level of distrust in automated authentication procedures; 21 percent said they don’t trust them at all. As Cohen observed of automation offerings out there for executives to consider and deploy, there’s trepidation. “It’s a really complex market right now with a lot of new technology … [Trulioo’s] been at this for 10 years, but in the last 24 months, the number of organizations that are attempting to do automated AML, automated KYC has been extensive. And so there’s always going to be variation in the ability to truly deliver automated and secure processing with high assurance.”

But the trend is toward optimism, he added, where firms and regulators have the opportunity to reverse distrust by promoting appropriate and effective verification systems and platforms that are flexible enough to embrace a range of use cases over time.

Against that backdrop, Cohen said, executives can tackle risk and compliance not as a cost center but as a revenue driver. It’s true, of course, that if companies don’t comply with obligations, they will be fined, and that successful fraud attempts will damage firms’ reputations (and financial health).

“But when you understand that it’s actually a revenue driver, you can implement these types of technology and the strategic planning around these types of technology earlier as you pursue your overall goals,” he said, thus streamlining onboarding activities, for example, so that top line torque happens more quickly. The demands are too great for firms to tackle all on their own with verification efforts done wholly in-house, said Cohen, so partnering with firms like Trulioo can make strategic sense.

“It will change the trajectory and the success of a business significantly depending on which tools you use and who you choose to partner with on that journey,” Cohen said.