KYC for NFTs is a compromise between law and decentralization. NFT space needs cleaning up, says Ryan Wilkinson, Product Manager at Blockasset.co.
It’s no secret that the world of digital assets and decentralized applications (DApps) is growing at an alarming rate. However, the industry remains a wild west for regulators and governments struggling to find solutions to implement KYC/AML requirements without stifling growth and innovation.
KYC refers to “Know Your Customer”, which is a process that most (if not all) financial institutions must comply with in order to conduct business legally in their respective jurisdictions. The primary purpose of the Anti-Money Laundering (AML) process is to ensure that financial institutions do not launder money or finance terrorism (finance crime, essentially), and it is often used in conjunction with KYC to help protect consumers/investors.
Although AML processes are still relatively new to the blockchain and crypto industry, there is no doubt that NFT-related businesses would greatly benefit from the voluntary adoption of some form of these regulations.
KYC and AML: why NFTs need them
Throughout 2021, non-fungible tokens (NFTs) have become one of the hottest sectors in the world of decentralized finance, with NFT sales reaching $10.7 billion in Q3 2021. So As the NFT market is still young, the industry’s underlying growth opportunities have caught the attention of investors, regulators, and criminals.
NFTs have become very popular, especially in their use to represent digital artwork. One of the most famous works of art in this space which sold for over $69 million was a mosaic by the digital artist Beeple. Other artists like Grimes also joined the fray, selling around $6 million worth of digital artwork after launching it within hours. Simply put, NFTs have exploded in popularity, especially in the realm of digital art, as they offer artists and creators a way to monetize their productions.
However, just as the traditional art industry has long been known to be a hotbed of fraud and money laundering, the NFT-based digital art space is also gaining a reputation for attracting interested criminals. through money laundering.
As an application on the blockchain, NFTs are made vulnerable to fraud and money laundering. Bad actors can buy a work of art from themselves and resell it to an account they control at a loss. This is to avoid paying taxes on these funds.
Alternatively, criminals can use the same procedure to launder illegal money and make it appear as legal money acquired through profits from NFT sales.
In the absence of KYC and AML procedures in the NFT space, these illegal activities and vulnerabilities will continue to persist while threatening the development of long-term market reliability.
KYC and AML solutions for the NFT space
No one is suggesting that we should completely remove anonymity. But, we can at least try to reconcile it with KYC by using a decentralized AML system. It can allow users to “connect” their real identities through an identity verification process while simultaneously ensuring that no centralized entity can ever take complete control of the data.
Currently, KYC measures are already in place on most crypto exchanges. Yet, none of the major NFT marketplaces have KYC or AML screening for their users. This makes the NFT market vulnerable to bad actors willing to use money laundering schemes to make their sales appear legitimate or simply manipulate the NFT market.
KYC verification is not an entirely new idea for NFTs. In practice, KYC and AML procedures can be implemented in the NFT market. Users verify their identity through the use of Know Your Customer (KYC) procedures before they can gain admission to access or purchase NFT Marketplace products.
Additionally, industry players can develop Compliance-as-a-Service platforms. This is an internal industry solution to help NFT platforms develop stricter protocols and more detailed AML and KYC requirements. A compliance-as-a-service solution within the industry will also prevent governments from unilaterally imposing backward and burdensome regulations on the NFT industry.
Next Vital Steps
All this happens in a space where anonymity is often presented as one of the main characteristics that distinguishes it from traditional sectors. The decentralized world of blockchain networks, cryptocurrencies, and NFTs offers entrepreneurs and innovators the opportunity to provide a truly empowered digital footprint where consumers can enjoy complete privacy.
However, as we have seen over the past few months, KYC measures will be necessary for the NFT market if there is any hope of attracting new users and investors. With the implementation of KYC and AML in the NFT space, regulators, market participants and consumers can find a user-friendly solution without compromising the benefits of decentralization.
Got something to say about KYC, AML or something else? Write to us or join the discussion in our Telegram channel.
All information contained on our website is published in good faith and for general information purposes only. Any action the reader takes on the information found on our website is strictly at their own risk.