Bitcoin, Litecoin, Etherium - just three of an estimated 6,088 cryptocurrencies according to CoinMarketCap in August 2020, with a $337.28 billion market cap. But, as crypto grows, along with the use of digital identities, so does the need for regulation and protection against fraud.
Subsequently, we discuss potential risks that should be mitigated in order to create a desirable relationship between the individual, public institutions, and the private sector, in a world where self-sovereign identity (AKA decentralized identity) management has become the norm. (frontiersin.org)
Turn the clock back to before the Bitcoin boom of December 2017, and the landscape for crypto was very different. Associated with the dark web, crime, and ill-gotten means, cryptocurrency (and especially Bitcoin) suffered damage to its reputation that it has struggled to shake off, despite the secure nature of the format itself.
The boom did bring with it a beacon of credibility; money talks after all. Big business and tech-savvy individuals began to take the format more seriously and many Bitcoin millionaires were made, some literally overnight.
The modern economic system is showing its cracks, straining under the pressure of a reactive economy that doesn’t allow for true financial freedom on a wide scale. People crave freedom in general and seek it through the one way our current societal structure allows: their bank balances.
Crypto offers a glimmer of hope that a solution exists to the issue that money needs to be distributed to achieve overall global wealth, rather than removed from the system on a large scale. Having an independent way of exchanging their money is the major draw of crypto for many individuals.
The real advance in popularity came when the City started showing an interest. With marketplace dynamics similar to equities, such as the ability to trade over a number of exchanges and the fact tokens are directly linked to supply and demand, crypto presented a plethora of opportunities for speculation and investment. Here is where the once wide chasm between crypto and the traditional financial system is bridged, with potential for big returns on investment for savvy traders.
Doing things by halves is never a good idea, but in fintech it could also cost you dearly. Taking a proactive approach to cryptocurrency regulation has great benefits over the type of approach seen in the United Kingdom, where existing legal frameworks are being moulded to accommodate Bitcoin, Ethereum and Litecoin, amongst others.
Adapting a system designed for offline currency and markets will surely be inferior to solutions built from the ground up, tailored to digital currency and digitally native – in the original sense. However, whilst this is not the case right now, services like Veriff can step in to provide digitally secure identity and crypto address verification which will fill the void and minimise the risk of fraud with high volumes of user sign-ups. Verifying digital credentials is hugely important here.
European authorities are currently discussing a digital crypto version of the Euro, leading the way on government backed projects and seemingly way ahead of the UK - happy to welcome cryptocurrencies so long as they adhere to current legislation.
The British approach relies heavily on legislation already in place, an almost laissez-faire attitude that makes life easier for currencies, operators and financial institutions, but can leave entities and their customers dangerously vulnerable to fraud and identity theft.
In the meantime, Europe is embracing stablecoins, the cryptocurrencies that are designed to fluctuate as little as possible from any given value. Capital, investor rights and supervision will be more tightly controlled, with the changes only affecting companies dealing with 1 million euro ($1.1 million) plus each year. Backed by reserves of Fiat currencies in many instances, they can trade smoothly with Bitcoin and other altcoins, allowing a safe haven for volatile funds instantly.
A sandbox approach spearheaded by the European Commission gives guidance to regulators, allowing them to get familiar with Distributed Ledger Technology (DLT) without an overbearing authority doubling down on them, allowing them space for exploration and innovation using blockchain technology.
The United States’ position stands from circa May 2018, that Bitcoin and other altcoins are not deemed as currency or legal tender but a commodity such as stocks that is taxable. Cryptocurrency earned is taxed as income, as with property. Paying independent contractors for goods and services with crypto must be reported to IRS as they will be liable to pay taxes. As with stocks and bonds, capital gains on cryptocurrency balances is taxable within the US.
Contrasting approaches to legislation around the world leave gaps that make the system vulnerable. It is down to providers of verifiable credentials, as well as anti-money laundering and identity theft protection providers, to plug these gaps. 'Knowing your customer' can ensure that ID theft and money laundering are minimised and give more control over how client accounts are managed.
Veriff can play a key part in the secure setup of any crypto based service or product with crypto identity verification. We're experts in digital identity management and our end-to-end user verification tool gives peace of mind when faced with the potential anonymity of cryptocurrency, making sure providers have a clear picture of who their customers are, by age, location, and identity, in seconds. Clients will experience a hassle-free onboarding experience and have the security of knowing the appropriate steps are being taken, which in turn aids a provider's scaling prospects.
The double-edged benefit of using a third party identity verification solution like ours not only serves to plug the leaks in a disjointed web of global legislation, but also ensures providers are well on their way to adhering to current KYC (vital for obtaining and keeping your licence) and AML legislation, as well as being ready for future enforcements that will inevitably tighten around customer and user identity.