The Importance of KYC and AML for an STO

As we start the year with all the talk declaring the death of the ICO in 2018 and “long live the STO” for 2019, it’s worth remembering that the tokenization economy is here to stay, no matter what three-letter acronym we choose.

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STO’s Need KYC and AML

The investor excitement and appeal of fund-raising using the blockchain still remains, it’s just morphed from ICO to STO because of the regulatory compliance required to protect us, the investor, from unscrupulous issuers.

And, indeed, protecting the issuer from unscrupulous investors who are attempting to “launder” their ill-gotten gains by purchasing legitimate tokenized securities.

So, what’s going to be different for digital securities in 2019?

The answer is yet another pair of three-letter acronyms, first, KYC or Know Your Customer and second, AML or Anti-Money Laundering.

In its simplest form KYC means that the security token issuer must take reasonable steps to identify their investors. Knowing the investor is the first part, then the issuers, or their regulated financial intermediary, must then ascertain that the investor funds are clean.

They do this by checking the investor against numerous AML lists, such as the Office of Foreign Assets Control (OFAC) list from the financial intelligence and enforcement agency of the U.S. Treasury Department.

KYC and AML protects an issuer from bad investors, but who protects investors from bad issuers? In 2019, legitimate issuers will retain a firm to offer their securities to the public and this firm must be licensed by the U.S. Financial Industry Regulatory Authority (FINRA).

This licensed firm will perform the necessary background checks on the issuer, just as they would for an IPO, or face FINRA and SEC enforcement if they fail to protect investors.

Issuers will need a high-tech, high touch KYC solution to on-board investors. Their financial intermediary will need high quality investor data to review and to run all the AML checks. These are the fundamental building blocks to launch a regulatory compliant STO in 2019.

Check out https://kycware.com for more information and a live demonstration of a high-tech, high touch KYC and AML platform for issuers and regulated financial intermediaries alike.

Written by

Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities.

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