How to Ensure KYT and KYC Compliance in Bitcoin for the current market?

Bitcoin took the world by storm with its meteoric rise in value to nearly $20,000. Since then, global regulators have cracked down on cryptocurrency, citing a need to register as a security, commodity, or currency. The biggest worry came in the form of enforcing Know Your Customer (KYC) and Know Your Transaction (KYT) rules. A new bill, dubbed the Cryptocurrency Act 2020, making its way through Congress seeks to clarify financial regulatory rules.

The bill calls for digital assets, which are collectively known today as cryptocurrency and blockchain, to be divided into three distinct categories:

  1. Cryptocurrencies - These tokens function like pure currencies, which means they can be spent (and regulated) like fiat currencies. Bitcoin (BTC) and Litecoin (LTC) are cryptos.
  2. Crypto-commodities - Crypto-commodities differ from currencies in their fungibility. Unlike Bitcoin, Ethereum (ETH) acts as an underlying network for crypo-commodities, like CryptoKitties, which is a fungible asset.
  3. Crypto-securities - Any crypto tokens that fail the Howey Test become securities that will require registration with the Securities and Exchanges Commission (SEC).

Which category a crypto asset falls under ultimately determines how it can be traded/sold and which agency regulates it. This means a formerly gray, almost outlaw, global market will trickle into more familiar territory for businesses.

Opening 2020 with a growing footprint of over 4200 Bitcoin ATMs in the U.S. alone means more businesses are getting involved in crypto already.

Here's what you need to know about dealing with cryptocurrencies like Bitcoin legally.

What Are KYT and KYC?

Anyone working in the banking industry is familiar with KYC. It's drilled into everyone from the c-suite to the entry level. That's because it's the guidelines set by the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) for analyzing financial data for evidence of criminal activity.

It was set up to combat terrorism, money laundering, and other criminal enterprise behavior by requiring banks to identify customers, record transactions, and report large transactions above certain thresholds. KYC will apply for cryptocurrencies, but it's taken a step further with KYT.

Although legally categorized differently, each cryptocurrency and blockchain has structural similarities technically. Cryptocurrencies and blockchains use a digitial ledger. Monitoring the transactions on these digital ledgers is far more difficult than tracing transactions through the banks.

Why Bitcoin Is Difficult to Trace

The difficulty comes in the the psuedonymous nature of Bitcoin. When you sign up for a bank account, you show your government-issued I.D. and open an account in your name. At best, you're opening it in a business name, but they'll still require a human representative like Jane Smith.

From that point, the bank acts as your financial psuedonym online, protecting your transactions by centralizing it within their networks.

Blockchain's digital ledger is different. Bitcoin users aren't Jane Smith, they're j@435M!t4, and many users hide behind VPNs. Privacy coins, like Monero, take things a step further by also anonymizing user transactions and adding layers of protection.

That's why KYT tools are so vital. Much like porting a game between consoles and PC, technological hurdles need to be overcome to provide true KYC to the crypto industry. Laws are great, but technology is necessary to enforce them.

Ensuring KYT and KYC Compliance

Businesses dealing with crypto and blockchain need to understand these pending regulations contained in the Cryptocurrency Act 2020. They represent the most clear indication the industry has had so far of the direction the U.S. government's stance on cryptocurrency.

The SEC's back and forth with Ethereum and President Donald Trump's outright ant-Bitcoin sentiment long signaled regulation was coming. Cryptocurrency exchanges are already taking their time and reevaluating rules in the U.S. before opening exchanges. It's unclear when Binance, one of the largest cryptocurrency markets in the world, will reopen to U.S. investors.

Blockchain and cryptocurrency were created with a dream of turning finance into a more transparent and collaborative effort. Chainalysis completes that dream with the tools to help businesses, governments, users, and blockchains remain compliant.

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