Bitcoin Due Diligence and The Blockchain

bitcoin due diligence blockchain

Bitcoin Due Diligence and The Blockchain

Published Wednesday, March 7th, 2018

The mainstream financial industry is grappling with Bitcoin due diligence. Some big banks are worried about Bitcoin, while more nimble banks and companies are embracing the cryptocurrency and its blockchain technology for increased compliance and business growth.

As Anti-Money Laundering (AML) regulation evolves to meet new demands, some are heralding the blockchain as a due diligence hero. Despite the naysayers, select Bitcoin-friendly financial institutions are enhancing customer due diligence and embracing blockchain for its security.

Financial Institutions Debanking Bitcoin

In many cases, financial institutions aren’t scaling their compliance programs at a pace to match their business growth. At the same time, they are also failing to stay ahead of the industry by developing technology to effectively manage the risk associated with emerging financial services. Regulators, however, are not slowing down in their prosecution of rule violations and financial crime.

When BSA and AML deficiencies are discovered at financial institutions, regulators are showing an increasing willingness to hold individuals personally liable. In the past year, multiple bank employees and compliance officers have been fined, barred from the financial industry, or charged with crimes for knowingly violating the BSA.

This is adding fuel to the fire when it comes to bank derisking, or the act of banks shutting out entire industries that are deemed “risky.” Cryptocurrency is one such industry that financial institutions are choosing to derisk, and thereby debank. Banks are shutting out consumers by prohibiting them from purchasing digital currencies using their bank-issued ATM or credit cards.

Banks are shutting out Bitcoin-related businesses by denying their access to the Bitcoin-friendly banking services they require. Without a reliable bank account, Bitcoin-related businesses are left without a way to rotate their working capital.

Cryptocurrency Compliance Trends

While big banks are shunning digital currencies, both the Chicago Boards Option Exchange (Cboe) and the Chicago Mercantile Exchange & Chicago Board of Trade (CME Group Inc.) have launched Bitcoin futures. As Bitcoin is welcomed (by some) into the mainstream financial arena, cryptocurrency compliance is the hot topic.

In Malta, regulators and the government are proposing principles-based regulation that is set to become the world’s first blockchain regulation. The proposed regulation would give a “rubber stamp of approval” to blockchains that have an administrator and auditor upholding their duties. This takes the focus away from the intellectual property of each blockchain.

The Maltese government says it’s taking a “calculated risk” to embrace blockchain in hopes of diversifying its burgeoning economy. Their proposed regulation takes a more global view while other governments are concerning themselves with how to regulate initial coin offerings (ICOs). If Malta pushes it through, they will be the ones to set the pace for blockchain regulation around the world.

Anti-Money Laundering & the Blockchain

Blockchain technology is a term used to refer to shared ledger technology or distributed databases. A blockchain is operated by “miners” who generate blocks of validated transactions and include them in the blockchain. In the case of Bitcoin, miners are rewarded for their efforts with coins. As they work, miners create and grow a distributed ledger where each piece of the chain is independently validated.

The blockchain itself is immutable and transparent. Any attempts to falsify the ledger should fail since changes come with a high computational cost and require consensus among ledger participants. In other words, the ledger is theoretically immune to hacking and falsification. The blockchain is also decentralized, making it the exact opposite of the traditional banking system.

For traditional AML/BSA efforts, the anonymous, decentralized nature of the blockchain is a serious obstacle. When cryptocurrencies use the blockchain, however, users are identified at both ends of the transactions through their digital wallets, where tokens are stored. Parties can send and accept tokens from one wallet to another using their identification codes. These codes eliminate the need for names to be directly associated with the transactions and protect anonymity.

Due Diligence and Bitcoin

While each Bitcoin transaction is seemingly anonymous, individuals and groups are still required by most countries to undergo the know-your-client (KYC) process when they open a Bitcoin wallet. The identity of parties using a digital wallet is thereby compromised and subject to KYC regulations, processes, and standards.

For Bitcoin-friendly banks, this means that a robust KYC process and compliance program can mitigate the risk associated with financial transactions. Information gathered during the KYC process can also be immediately transmitted to a Bitcoin-related business’ financial institution.

There are still some places where you can open a digital wallet without a background check or strict identification, which could potentially allow dirty money to enter the system. The risk is similar to the risk associated with other financial transactions and is not high enough to warrant bank derisking of the digital currency industry.

Blockchain technology also invites the opportunity for an integrated AML effort. If it received permissioned, an AML system could leverage the secure, decentralized, and immutable nature of the technology. An integrated AML system on the blockchain could identify and stop suspicious transactions in their tracks. This is still highly theoretical, but it demonstrates how compliance programs and regulators could embrace the blockchain for AML efforts beyond KYC in digital wallets.

Banking and Due Diligence for Bitcoin ATMs

Bitcoin ATM operators are embracing customer due diligence and KYC through BankLine’s innovative Bitcoin banking services. BankLine enhances the customer due diligence process for both its Bitcoin ATM clients and its Bitcoin-friendly financial institutions. To do this, they use an integrated system for delivering customer data in the appropriate format. Banks are able to process this information as a part of their own compliance programs.

BankLine partners with multiple Bitcoin-friendly financial institutions to provide “redundant” banking for Bitcoin ATM kiosk operators. If derisking occurs, there are multiple banks ready and waiting to take over the account. This ensure continuity and allows kiosk operators to scale to meet the rising demand for Bitcoin ATMs.

In addition the banking and due diligence for Bitcoin ATMs, BankLine offers nationwide cash logistics services. This allows kiosk operators to break free from the geographic constraints imposed by their banks and their armored cash transportation partners. Cash logistics enable Bitcoin-related businesses to rotate their working capital and stay operational.

Apply online or by phone today and discover how BankLine can serve your Bitcoin ATM with banking, due diligence, and cash logistics.