How to Ensure Compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations in Tokenization + BONUS: Top 5 KYC Providers!

Karolina

16 Jun 2023
How to Ensure Compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations in Tokenization + BONUS: Top 5 KYC Providers!

In recent years, tokenization - the act of turning real-world assets or rights into digital tokens on a blockchain - has garnered significant attention. Powered by blockchain technology, artificial intelligence, and cryptocurrencies, this innovative method has transformed industries like finance, real estate, supply chain, among others. Nevertheless, as tokenization becomes more widely adopted, adhering to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations becomes increasingly important.

AML and KYC compliance within tokenization is imperative for tackling potential risks linked to financial crimes such as money laundering, terrorist financing, and fraud. Through the adoption of stringent compliance measures, businesses can showcase their dedication to upholding integrity, security, and transparency in the tokenization ecosystem.

This article delves into strategies and best practices for achieving AML and KYC compliance in tokenization. By abiding by these principles, companies active in the tokenization domain can protect their operations, stakeholders, and further solidify the industry's overall credibility and sustainability.

Understanding Tokenization and Its Regulatory Landscape

Tokenization

Tokenization, a procedure involving the transformation of tangible and intangible assets or rights into digital tokens on a blockchain, plays an essential role in various domains such as financial securities, real estate properties, intellectual property, and even tangible assets like art or collectibles. By harnessing the advantages of blockchain technology – immutability, transparency, and decentralization – tokenization offers a secure and efficient way to represent and transfer assets.

The regulatory environment of tokenization and adherence to AML and KYC regulations

With increasing adoption of tokenization, global regulatory bodies actively evaluate its ramifications and devise frameworks to mitigate potential risks and ensure compliance. The regulations concerning tokenization differ across jurisdictions – some embrace innovation while others enforce strict rules.

Adhering to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations is crucial in the realm of tokenization. AML regulations aim to block the integration of illicit funds into the financial system, while KYC regulations center on customer identity verification to prevent money laundering and terrorist financing activities. Complying with these guidelines allows businesses to reduce financial crime risks, uphold operational integrity, and instill trust among stakeholders.

What is KYC?

KYC is a requirement by which regulated entities must obtain personal information about a customer to ensure that their services are not misused and ensure that people applying for financial services are not on sanctions or PEP lists.

What is AML?

AML is a framework of laws and policies aiming to prevent and identify financial crime, including everything from terrorist financing to money laundering. For most institutions, AML will start with KYC — knowing your customers — and will then continue through monitoring financial activity and reporting suspicious behavior. 

Read more here

The importance of AML and KYC regulations in tackling financial crimes

AML and KYC regulations serve as vital tools in combating financial crimes such as money laundering, terrorist financing, and fraud. Money laundering concerns disguising illegal funds’ origins to make them appear legitimate, while terrorist financing entails funding terrorist activities.

Employing comprehensive AML and KYC procedures enables businesses to participate in the prevention, detection, and reporting of suspicious activities. Financial institutions and businesses engaged in tokenization must perform rigorous due diligence on customers, scrutinize transactions for unusual patterns, and inform the relevant authorities of any suspicious activities. Complying with AML and KYC regulations not only aids in thwarting financial crimes but also protects businesses' reputation and fosters a secure and reliable tokenization ecosystem.

Read more about Regulatory Landscape

Applying AML and KYC Compliance Measures to Tokenization

Comprehensive Customer Due Diligence (CDD) Execution

The significance of CDD for validating token holders' identities

  • In the tokenization process, customer due diligence (CDD) plays a crucial role in verifying and authenticating token holders' identities.
  • CDD assists in confirming customers' true identities, evaluating their risk profiles, and uncovering any potential participation in unlawful activities.
  • Thorough CDD helps companies adhere to KYC regulations, reduce the likelihood of money laundering, and improve the overall security of their tokenization platform.

The primary components of CDD, including customer identity verification, risk profile assessment, and transaction activity monitoring

  • Customer identity verification: Implement strong identity verification methods to authenticate token holders. This could entail gathering government-issued ID documents, performing biometric verification, or using digital identity solutions.
  • Risk profile assessment: Determine each customer's risk by considering factors such as occupation, jurisdiction, transaction history, and funding source. Allocate risk scores or categories to effectively prioritize monitoring efforts.
  • Transaction activity monitoring: Create mechanisms to track token transactions in real-time. Employ transaction monitoring systems that can detect suspicious patterns like large transactions, frequent transfers, or interactions with high-risk jurisdictions.

Strengthened Transaction Monitoring

The need for real-time token transaction monitoring to identify suspicious actions

  • It is vital to monitor token transactions in real-time to detect and prevent potential money laundering or fraudulent activities.
  • Prompt detection and response to suspicious patterns, such as multiple high-value transactions or rapid fund transfers, are made possible by real-time monitoring.

Blockchain analytics tools' role in tracking and analyzing transaction patterns

  • Blockchain analytics tools take advantage of blockchain technology's transparency to monitor and examine token transactions.
  • These tools allow businesses to trace fund flows, pinpoint addresses connected to suspicious activities, and gain insights into transaction patterns that may signal potential money laundering or other illicit actions.

Establishing Solid AML and KYC Policies and Procedures

The significance of creating well-defined AML and KYC policies specifically designed for tokenization:

  • For companies engaged in tokenization, it is vital to establish detailed AML and KYC policies that address tokenized assets' unique features and risks.
  • These policies should take into account regulatory requirements, industry best practices, and the specific nature of tokenized transactions to ensure compliance efficacy.

Collaborative Efforts with Regulatory Authorities and Compliance Specialists

By actively collaborating with regulatory authorities, businesses can remain informed about current regulatory progress and foresee any alterations that may affect their AML and KYC compliance obligations due to tokenization.

Collaborating with experienced compliance advisors who have deep knowledge of AML, KYC, and tokenization regulations is critical for creating and executing effective compliance structures for tokenization ventures.

These professionals can offer guidance on crafting strong AML and KYC policies, carrying out risk evaluations, and enforcing industry-standard and regulator-approved compliance processes.

TOP 5 KYC Providers

  1. Fractal

Fractal offers user onboarding for compliance use cases like KYC and KYB. It covers all kinds of KYC levels all in one price. Projects can also make use of its liveness solution which guarantees unique users for e.g. airdrops or crypto games without ever revealing the identity of the user.

  1. SolidProof

SolidProof is a German-based KYC provider with a simple, efficient, and smooth process that adheres to the highest security standards. In addition, the company’s services are affordable, have no hidden costs, and offer a free audit for every project.

  1. Identity.com

Another popular KYC solution is Identity.com. The project focuses on decentralized identity verification and offers a marketplace and gateway protocol. The company does not trade personal information, which increases security and privacy. The project also focuses on decentralization.

  1. Elliptic

Elliptic is another excellent solution for KYC and compliance needs for traditional financial institutions and crypto and NFT projects. They offer various services, including wallet screening, transaction monitoring, VASP screening, and enhanced due diligence.

  1. Blockpass

Blockpass is famous for its quick, easy signup process and automated KYC solution. Blockpass offers a full-service, comprehensive solution for all onboarding needs – including AML watchlist checks. So if you’re looking for a fast, simple, and easy-to-integrate solution, Blockpass is worth considering.

Conclusion

Complying with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations is essential in tokenization to combat financial crimes, ensure the integrity of operations, and foster trust within the tokenization ecosystem. By implementing robust AML and KYC compliance measures, businesses involved in tokenization can mitigate the risks of money laundering, terrorist financing, and fraud.

The implementation of thorough customer due diligence (CDD), enhanced transaction monitoring, and the development of comprehensive AML and KYC policies tailored to tokenization are vital steps in ensuring compliance. Leveraging technologies such as artificial intelligence (AI) and blockchain analytics tools enhances the efficiency and accuracy of compliance efforts.

Are you interested in tokenization? Contact us!
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Aethir Tokenomics – Case Study

Kajetan Olas

22 Nov 2024
Aethir Tokenomics – Case Study

Authors of the contents are not affiliated to the reviewed project in any way and none of the information presented should be taken as financial advice.

In this article we analyze tokenomics of Aethir - a project providing on-demand cloud compute resources for the AI, Gaming, and virtualized compute sectors.
Aethir aims to aggregate enterprise-grade GPUs from multiple providers into a DePIN (Decentralized Physical Infrastructure Network). Its competitive edge comes from utlizing the GPUs for very specific use-cases, such as low-latency rendering for online games.
Due to decentralized nature of its infrastructure Aethir can meet the demands of online-gaming in any region. This is especially important for some gamer-abundant regions in Asia with underdeveloped cloud infrastructure that causes high latency ("lags").
We will analyze Aethir's tokenomics, give our opinion on what was done well, and provide specific recommendations on how to improve it.

Evaluation Summary

Aethir Tokenomics Structure

The total supply of ATH tokens is capped at 42 billion ATH. This fixed cap provides a predictable supply environment, and the complete emissions schedule is listed here. As of November 2024 there are approximately 5.2 Billion ATH in circulation. In a year from now (November 2025), the circulating supply will almost triple, and will amount to approximately 15 Billion ATH. By November 2028, today's circulating supply will be diluted by around 86%.

From an investor standpoint the rational decision would be to stake their tokens and hope for rewards that will balance the inflation. Currently the estimated APR for 3-year staking is 195% and for 4-year staking APR is 261%. The rewards are paid out weekly. Furthermore, stakers can expect to get additional rewards from partnered AI projects.

Staking Incentives

Rewards are calculated based on the staking duration and staked amount. These factors are equally important and they linearly influence weekly rewards. This means that someone who stakes 100 ATH for 2 weeks will have the same weekly rewards as someone who stakes 200 ATH for 1 week. This mechanism greatly emphasizes long-term holding. That's because holding a token makes sense only if you go for long-term staking. E.g. a whale staking $200k with 1 week lockup. will have the same weekly rewards as person staking $1k with 4 year lockup. Furthermore the ATH staking rewards are fixed and divided among stakers. Therefore Increase of user base is likely to come with decrease in rewards.
We believe the main weak-point of Aethirs staking is the lack of equivalency between rewards paid out to the users and value generated for the protocol as a result of staking.

Token Distribution

The token distribution of $ATH is well designed and comes with long vesting time-frames. 18-month cliff and 36-moths subsequent linear vesting is applied to team's allocation. This is higher than industry standard and is a sign of long-term commitment.

  • Checkers and Compute Providers: 50%
  • Ecosystem: 15%
  • Team: 12.5%
  • Investors: 11.5%
  • Airdrop: 6%
  • Advisors: 5%

Aethir's airdrop is divided into 3 phases to ensure that only loyal users get rewarded. This mechanism is very-well thought and we rate it highly. It fosters high community engagement within the first months of the project and sets the ground for potentially giving more-control to the DAO.

Governance and Community-Led Development

Aethir’s governance model promotes community-led decision-making in a very practical way. Instead of rushing with creation of a DAO for PR and marketing purposes Aethir is trying to make it the right way. They support projects building on their infrastructure and regularly share updates with their community in the most professional manner.

We believe Aethir would benefit from implementing reputation boosted voting. An example of such system is described here. The core assumption is to abandon the simplistic: 1 token = 1 vote and go towards: Votes = tokens * reputation_based_multiplication_factor.

In the attached example, reputation_based_multiplication_factor rises exponentially with the number of standard deviations above norm, with regard to user's rating. For compute compute providers at Aethir, user's rating could be replaced by provider's uptime.

Perspectives for the future

While it's important to analyze aspects such as supply-side tokenomics, or governance, we must keep in mind that 95% of project's success depends on demand-side. In this regard the outlook for Aethir may be very bright. The project declares $36M annual reccuring revenue. Revenue like this is very rare in the web3 space. Many projects are not able to generate any revenue after succesfull ICO event, due to lack fo product-market-fit.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.

Nextrope Partners with Hacken to Enhance Blockchain Security

Miłosz

21 Nov 2024
Nextrope Partners with Hacken to Enhance Blockchain Security

Nextrope announces a strategic partnership with Hacken, a renowned blockchain security auditor. It marks a significant step in delivering reliable decentralized solutions. After several successful collaborations resulting in flawless smart contract audits, the alliance solidifies the synergy between Nextrope's innovative blockchain development and Hacken's top-tier security auditing services. Together, we aim to set new benchmarks, ensuring that security is an integral part of blockchain technology.

Strengthening Blockchain Security

The partnership aims to fortify the security protocols within blockchain ecosystems. By integrating Hacken's comprehensive security audits with Nextrope's cutting-edge blockchain solutions, we are poised to offer unparalleled security features in our projects.

"Blockchain security should never be an afterthought"

"Our partnership with Hacken underscores our dedication to embedding security at the core of our blockchain solutions. Together, we're building a safer future for the industry."

said Mateusz Mach, CEO of Nextrope

About Nextrope

Nextrope is a forward-thinking blockchain development house specializing in creating innovative solutions for businesses worldwide. With a team of experienced developers and blockchain experts, Nextrope delivers high-quality, scalable, and secure blockchain applications tailored to meet the unique needs of each client.

About Hacken

Hacken is a leading blockchain security auditor known for its rigorous smart contract audits and security assessments. With a mission to make the industry safer, Hacken provides complex security services that help companies identify and mitigate vulnerabilities in their applications.

Looking Ahead

As a joint mission, both Nextrope and Hacken are committed to continuous innovation. We look forward to the exciting opportunities this partnership will bring and are eager to implement a more secure blockchain environment for all.

For more information, please contact:

Nextrope

Hacken

Join us on our journey to deliver top-notch blockchain tech and a safer future for the industry!