Crypto Purgatory and the Importance of KYC

Crypto Purgatory and the Importance of KYC

More than 18 months has passed since the Initial Coin Offering (ICO) market was at fever pitch. Across 2018, there were 2,284 Initial Coin Offerings, raising almost $11.4 billion and averaging approximately $11.52 million per raise. But, as the year drew to a close, the number of offerings declined significantly and the shift towards regulated token sales began.

Despite its inherent regulatory shortcomings, the ICO model facilitated a number of success stories and empowered businesses to raise significant sums using cutting-edge technology. Withdrawing and using these funds, however, is where project owners struggled, and many continue to do so.

The key question is: if projects still have ICO proceeds trapped in crypto purgatory, how can they free them?

Cashing out

ICOs were the world’s first foray into blockchain-enabled fundraising. Using smart contract technology on the Ethereum blockchain, projects could program the execution of their token issuance within an immutable contract, with the desired actions being taken automatically as specific conditions are met. Put simply, it is a transparent if-then machine that facilitates a transaction without the need for a middle man.Contributors used cryptocurrency to send funds to an ICO project – Ether, Bitcoin, Litecoin or any other coin that the project decided to accept. Collecting these contributions was not the issue, however the same could not be said for cashing them out in fiat to pay service providers, salaries, rent and bills.

During the bull run, the majority of banks were still extremely conventional and not only would they not accept cryptocurrency, they refused to bank crypto-related businesses full stop. Even with those that would, such as Turicum Bank in Gibraltar, there would be a lot of legal deliberation, paperwork, long wait times, high transaction fees and general difficulty in drawing down a large quantity of crypto. The general trend among projects was to circumvent banks completely, using crypto exchanges or even by trading the cryptocurrency person-to-person. Finding a suitable and trusted exchange that operated in your local fiat currency (and was legal in your jurisdiction) was a challenge and trading relatively small amounts with individuals in the community was time-consuming and complex.

New possibilities

Without good banking options, the cost and time saved by undertaking an ICO versus traditional fundraising methods begins to wear away. Thankfully, the logistics of banking for crypto-related businesses have progressed considerably since the ICO boom, with emerging platforms such as Bankera, Wirex, Cashplus and Change now offering accounts geared specifically towards this market segment.

We’re getting there, but we’re not out of the woods yet: these pseudo banks still require the source of the proceeds from your raise to be verified to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations, rules and guidance.

KYC and AML are staple regulatory processes and we’ve all had to complete them at one time or another. The unregulated nature of ICOs meant that projects were not strictly obliged to implement the systems and carry out the processes that a provider of regulated products and services would need to. In many cases, checks were not undertaken to a sufficient standard or – particularly in the early days of ICOs – not at all.

The Tezos story

Inadequate onboarding processes have implications for the project not just in terms of withdrawing funds in fiat, but in terms of reducing fraudulent or criminal activity through their own platform. In one high profile example, the Tezos ICO, through which contributors bought a record-setting $232 million worth of utility tokens called “tezzies” (XTZ), made headline news a year after the completion of the raise when the company sought to retroactively onboard their investors. They cited the evolving regulatory landscape in the blockchain space and the importance of compliance as the key drivers.

This was initially met with a mixed response from their community, the benefits of taking what was a bold step for such a large project are clear. As at July 2019, 85% of the total token allocations have been activated by contributors, meaning that just 15% of all contributors have either not yet onboarded or not been able to access their tokens for administrative reasons.

Retroactive KYC & AML

Whether you’re looking to recover crypto which is “stuck in limbo” or purely to improve governance following your raise, you can retroactively onboard your ICO contributors in line with current Financial Action Task Force (FATF) and Joint Money Laundering Steering Group (JMLSG) requirements and guidance.

Torca is a mobile-friendly onboarding app that offers:

Simplicity for your investors

Our proprietary technology is purpose-built for token issuance onboarding, so it’s a simple, fast and painless process for you and your investors.

Full KYC & AML compliance

Our risk-based approach is built from UK Anti-Money Laundering and Counter Terrorist Financing legislation, sector rules and independent legal guidance, so your clients will be expertly assessed and verified.

Progress tracking and data export

Monitor progress in real-time from your dashboard and download individual KYC packs for onboarded investors.

Fair pricing

No unexpected fees; only pay for the investors that you successfully onboard.To speak with us about how Torca Onboard helps projects to achieve compliance and start using the funds they raised, drop James Smith a line at to arrange an introductory call.