Cryptocurrency imitates the key features of traditional currency and adds the advantages of providing transaction transparency and user anonymity. As invented by an anonymous programmer, the core nature of cryptocurrency is built around the concept of anonymity. In fact, one of the biggest selling points for cryptocurrency is the anonymity of the transactions.
Traders of cryptocurrency prefer to keep their transactions private for various reasons. Yet, cryptocurrency transactions are not completely anonymous. Instead, the transactions are actually “pseudoanonymous” because the blockchain ledger is public. For example, although a person’s name or address stays hidden, the person may be linked to a public Bitcoin address.
Crackdown on Anonymity
Countries around the world are struggling with regulating cryptocurrency. Government officials are afraid that the anonymity of cryptocurrency creates an easy method for criminals to commit cyber crimes, such as extortion, fraud, money laundering, tax evasion, and identity theft.
An article from CoinCentral, South Korean Law Firm Files Constitutional Appeal Against Exchange Regulations, by Colin Harper, explains how one country is trying to crack down on cryptocurrency crimes. In late 2017, the South Korean government required exchanges to verify the identity of an account holder. This requirement bans anonymous trading and only allows transfers through “real-name accounts.” Opponents vowed to fight the ban in court on the grounds that the new rules were unconstitutional.
Risk Avoidance with AML and KYC
In the United States, banks must follow Anti-Money Laundering (AML) regulations. The Bank Secrecy Act (BSA) of 1970 established a framework for a variety of regulations to prevent unlawful transactions.
After 9/11 and the global financial crisis, Congress enacted rigorous requirements to banking regulations. As part of the Patriot Act, banks must follow the “Know Your Customer” (KYC) rule, which strengthened the BSA. KYC requires banks to identify their customers and conduct due diligence to determine potential risks.
The AML and KYC rules form a basic structure to regulate cryptocurrency. However, these rules work against anonymity, which is the foundational philosophy of the blockchain. Regardless of the founding principles, many cryptocurrency exchanges require their customers to complete an account verification process to avoid risks. Meanwhile, the governments around the world continue to integrate the AML and KYC rules into their cryptocurrency regulations.
Alice M. Porch, Esq., CIPP/US, C|EH, Security+
Alice is a member of the Florida Bar, and she focuses on data privacy and cybersecurity compliance. She attended the Warrington College of Business at the University of Florida and earned a Bachelor of Science in Business Administration. After graduating, she earned a Juris Doctor at the Stetson University College of Law. During law school, she served as an Assistant Executive Editor for Stetson Law Review and also as a Staff Editor for Stetson Journal of Advocacy and the Law. She also served as a member of The Florida Bar Journal/News Editorial Board from 2018-2024. She is currently a member of the Florida Bar Cybersecurity and Privacy Law Substantive Law Committee.
