Bitcoin’s surprising rise in 2017 helped forge a new moment for digital currencies and blockchain technology. Since the beginning of its torrid run, hundreds of new blockchain startups, dubbed altcoins, have emerged to create a crowded and diverse ecosystem.
Every altcoin begins with an Initial Coin Offering (ICO), which is an interesting combination of the similarly named Initial Public Offering (IPO) and a crowdfunding campaign. For an ICO, a company often produces a white paper that outlines its product and a roadmap that describes its timeframe. After some marketing work and technical development, it’s time to launch. At this point, anyone with a digital wallet can buy into an ICO.
So far, this approach is incredibly successful. ICOs earned more than $4 billion in funding in 2017, and by some measures, they even outpace early-stage venture capital funding in their ability to make money for startups.
However, ICOs are almost entirely unregulated, which means that, among other things, ICO investors remain anonymous. In this case, the blockchain’s indelible privacy becomes more of a liability than an asset. Governments are concerned that the blockchain’s anonymity hampers ICOs from efficiently screening their investors and avoiding money laundering.
The Problem of Money Laundering in ICOs
At the end of December, The Wall Street Journal reported, “the laws against money laundering and know-your-customer compliance rule still generally apply, regardless of the new token on offer.” As cryptocurrencies surge towards a $1 trillion market cap, governments have started taking action against ICOs to thwart concerns over money laundering and other crimes committed through ICO fundraising.
Singapore’s government issued a press release earlier this year announcing its concerns that “ICOs are vulnerable to money laundering and terrorist financing risks due to the anonymous nature of the transactions, and the ease with which large sums of monies can be raised in a short period of time.”
In the fall, China became the first country to ban cryptocurrencies, in part because of the deregulated nature of ICOs. Moreover, South Korea’s actions against cryptocurrencies, undertaken for the same reasons, have had a tremendous impact on crypto markets. Finally, Jay Clayton, Chairman of the SEC, recently provided his official remarks on ICOs, and he expressed concerns about money laundering and illegal activity as well.
Governments around the world are unanimously concerned about the possibility that within the billions of dollars being spent on ICOs, money is being laundered, which can enable everything from terrorism funding to drug trafficking.
Of course, the problem of money laundering in ICOs isn’t just legal; It’s practical as well.
Ethereum co-founder Vitalik Buterin noted that “It is an established fact that ninety percent of startups fail. And it should also be an established fact that 90 percent of these ERC20s on CoinMarket Cap are going to go to zero.”
Just like any startup, many of these ICOs will fail, but some will undoubtedly succeed. When that happens, successful companies can’t have dark money and ethically dubious practices diminishing their brand or reputation. In other words, the opportunity for a bloated ICO now may hamper significant, legitimate growth later.
On a larger scale, if ICOs can’t demonstrate that they are successfully eliminating money laundering from their processes, then governments will be forced to take action, and that will slow the proliferation and operability of all ICOs.
All ICOs have a vested stake in stamping out money laundering, but the actual process isn’t quite that simple.
Few would argue that money laundering is a good thing. It’s bad for business, it harms people, and it undermines the aspirational ingenuity of blockchain technology. Unfortunately, finding a viable solution is more of a work in progress than a ready-made battle plan.
The solution, according to Coinfirm CEO – Pawel Kuskowski, “is for the innovative, creative and dynamic blockchain industry to develop more sophisticated capabilities to help companies be compliant.” Blockchain technology is some of the most innovative technology in the world, and it needs to continue to develop so that ICOs have a more reasonable opportunity to know their customers and to understand the nuances of their earnings.
In an incredibly meta example of blockchain development, there are several ICOs aimed at helping other ICOs avoid money laundering schemes by tokenizing user information and validating buyer identity. These might be promising initiatives, but they are far from a proven, large-scale, long-term solution.
Ultimately, the solution will come from this extremely vast group of forward thinking blockchain developers. They can decide that they don’t want this to be a part of their products and platforms, and they absolutely must do so. In general, individuals don’t to support morally dubious platforms and governments won’t permit illegal activity. Nobody wants to see the blockchain boom implode under the weight of unstoppable unlawful activity, and its developers have the opportunity to ensure that this isn’t the case.