Since cryptocurrencies burst onto the scene, we’ve seen both an advancement of innovation in the technical fields, as well as much resistance from the regulatory bodies. While this has played out in the courts, Congress and the media, regulations specifically centered around AML have caused the greatest hindrance. In this article, we’re going to be debunking the roadblocks found on the protocol highway, ironing out the issues that are obstructing the growth of digital assets and what means can be applied in order to see further developments.
In(ternet) the Beginning
Let’s start with the basics, and discuss what protocols are exactly, and where they came from. All websites and online companies operate off of an underlying code that allows them to function, this started with the internet and has been widely translated across the tech space since. HTTP is probably the most common example of this.
Abbreviated from HyperText Transfer Protocol, this is widely considered to be the backbone of the internet. HTTP is responsible for determining what actions the server needs to take in response to users’ requests, as well as how communication within the server is formatted and transmitted.
To break that down further, HTTP is the protocol that allows for the hypertext (series of text documents linked to each other via hyperlinks) to be transferred from the web server to the web browser. You might have also heard of HTTPS, this is essentially a Secure version of HTTP. All messages between the website and browser are encrypted through Secure Sockets Layer (SSL) or more recently, Transport Layer Security (TLS), ensuring that all data is shared more privately.
In the digital asset industry, each cryptocurrency operates off of a different blockchain (in most cases), and these blockchains function off their own set of protocols. While they may differ from HTTP and HTTPS, the “transfer of information” concept remains the same. Protocols used by blockchain technology provide the security of and access to the blockchain (in this case, the server). These protocols effectively allow for the communication of data.
In the decentralized world of cryptocurrencies, these protocols allow users to take control and manage their own data, as opposed to having a bank do it for you. Instead of paying for a service through a website via your bank, users are able to make direct payments from their accounts (or wallets) to the service provider’s account, garnering more control over their data. Crypto protocols form the foundation of all crypto-related apps built on top of them.
Taking a look at a few crypto protocols, we see how each is unique, and how they each offer something novel:
- Bitcoin: offers a peer-to-peer transaction of value without any third parties (banks). It’s protocol inhibits double-spending and offers non-refundable transactions.
- Ethereum: also allows the movement of funds with little third party interference, but runs primarily through smart contracts, storing multiple markets and registries of debt.
- Hyperledger: supports international business transactions, technology services and supply chain business by uniting leaders of various industries. The protocol provides a secure channel through which private information can be shared, a hub for open blockchain development.
While these protocols exist to power digital assets and further business growth in the market, they’re far from being exempt from any third party interference or mainstream financial services’ trust.
What Kind of Roadblocks are Inhibiting Protocols?
The greatest inhibiting factor when it comes to the growth of protocols is regulations, with a deliberate focus on Anti-Money Laundering (AML). For a protocol, or cryptocurrency, to be accepted outside of the cryptocurrency market, it needs to be accepted – and trusted – by regulated markets. In order to obtain this level of trust and acceptance, these protocols need to follow strict AML guidelines. In order for financial institutions, governments, consumers and regulators to trust cryptocurrencies, they need to be unequivocally certain that they are not engaging in any illicit or illegal transactions. And the best way to ensure this? AML practices.
Let’s look at an example illustrating the importance of incorporating the correct AML measures. A business decides to start accepting Bitcoin as a payment method, but received a coin previously involved in an illegal operation. The FBI has grounds to call back the illicitly used Bitcoin for their investigation and the company now loses out on their income. In another example, let’s say that this company has incorporated strong AML compliance solutions like real-time analytics and compliance risk management solutions into their payment methods, which put them firmly in control and alerted them before they accepted this coin.
These real-time analytics focus on the immediate (seconds or minutes) analyzing of data received – say a transaction – applied with logic and mathematics that provide instant insight into whether the company should accept this payment or not. With this tool, businesses are able to monitor addresses as well as transactions in real-time (live), evaluate and red flag cases, and maintain a perfect audit trail.
In terms of compliance risk management, this tool gives a business access to verifying the legality of a transaction within seconds. Scanning with integrated risk checks and data points for anything from counterparty identity to financial crime, this AML solution is able to verify in seconds whether the transaction could be a red flag.
Other roadblocks the industry faces in terms of development are interoperability and collaboration within the industry.
Interoperability is the inability for certain blockchain projects to communicate with other software to exchange and make use of information. This is due to various blockchain protocols using a large variety of consensus mechanisms, different coding languages, various privacy measures and protocols. Standardized measures put in place by a middle man, between the blockchain projects and the companies using them, would alleviate this, granted the middle man is willing to support the project.
Another roadblock in the development of blockchain protocols is the lack of collaboration from external parties. In order for the powers of blockchain to be utilized by industries outside of the digital asset industry, companies need to collaborate with projects that can offer technologies serving parallel needs. For instance, before Bitcoin can truly be considered a viable payment solution, companies will need to incorporate the payment solution into their businesses, one business at a time. The more businesses that support this payment solution, the more development can be focused on protocols.
In order to overcome the hurdle of adoption, we circle back to AML. AML in the crypto space requires certain measures to be applied, in order for more adoption to take place. In doing so, protocols will need to incorporate AML compliance solutions.
Best Practices To Overcome Roadblocks
What are these AML compliance solutions? They’re the future for all financial institutions, cryptocurrency exchanges, coins, protocols, government and regulators. These sectors require a distinct level of risk management, and by incorporating these kinds of solutions, they can enjoy a more streamlined transaction model, in the safety zone.
A key tool in overcoming protocol roadblocks is for these companies wanting to engage in crypto transactions, to utilize the Coinfirm AML platform. Companies are now able to join the platform and utilize over 200 proprietary algorithms and 300 risk scenarios to analyze risk on certain supported protocols (cryptocurrencies). All entities that interact with these companies instantly become AML compliant, while having access to features like real-time transaction monitoring, AML risk reports, investigatory tools, case management, among other things.
Coinfirm, a leading AML, analytics and RegTech solutions provider, was co-founded by the former Global Head of AML Function for Royal Bank of Scotland. Co-founder and CEO, Paweł Kuskowski says, “With innovation comes responsibility. We’re providing seamless AML solutions for cryptocurrency and blockchain assets that create a safer and growing crypto-economy.”
Recently, Coinfirm integrated Tezos into their AML platform. Tezos is a decentralized, public blockchain that evolves by upgrading itself in a secure and organic internal manner. Currently ranked in the top 15 coins on CoinMarketCap, this cryptocurrency has seen great success in both innovation and market adoption over the past year. An ideal long-term solution for financial applications, like digital securities, Tezos and Coinfirm joined forces to further develop their adoption.
Coinfirm offers the industry’s largest blockchain coverage, supporting over 1,400 protocols and cryptocurrencies, among them Bitcoin, Ethereum, and Hyperledger. Used by market leaders globally, crypto exchanges like Binance, and protocols like XRP, along with major financial institutions like PKO BP, are all utilizing Coinfirm’s ingenious solutions.
This partnership allows all users of the Coinfirm AML Platform – such as cryptocurrency exchanges, custodians, or financial institutions – to actively use Coinfirm’s tools for Tezos and XTZ. While also offering blockchain AML & transaction monitoring solutions for the Tezos protocol and its native cryptocurrency. Not only instilling more trust in the cryptocurrency, but furthering its net of potential users.
Debunking Roadblocks on the Protocol Highway
A giant step in moving towards the further growth and development of digital assets is instilling trust in those that use them – on both ends of the scale. By incorporating AML solutions, companies are able to rest assured that the income they are generating is both legal and compliant with the most traditional regulatory bodies. By rectifying this aspect of the industry, cryptocurrencies are able to push their growth and development, and seek leadership positions outside of the digital asset space, and venture into the mainstream financial sector as well. First, we debunk these roadblocks, then we eradicate them completely. Join the movement.