Five Reasons Why KYC Is Crucial for Your ICO Investment

December 2, 2017 1:37 PM UTC

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Regulators in countries across the globe are taking an increasing interest in ICOs. This creates uncertainty for both Offerers and for those who want to invest.

There are many fully legal reasons to invest in an ICO, ranging from belief in the utility of a new piece of Crypto infrastructure to speculation on a coin’s rising value. Outside of these legal motivations, there is the practice of laundering fiat currency. Unfortunately, the ongoing lack of regulatory clarity means many people who wish to invest in a project for its intrinsic utility to disrupt established industries for the better feel they risk being treated as money launderers.

While the hope is that national legislators will strike the right balance between protecting citizens from scams and allowing capital to flow into worthy projects, it doesn’t hurt for ICOs with truly innovative goals to exercise caution.

While national legislation is sometimes absent or unclear, Know Your Customer (KYC) is a broadly understood concept in global finance.

Offerors need to have at least the possibility to know vital information about investors. While the development of bitcoin from the cypherpunks onwards onwards is firmly based on the desire to free people from domination by governments and banks, this does not alter the fact that trading parties have a legitimate interest to know certain information about their counterparty, such as links to terrorism or organised crime, in order to fulfill the necessary contract.

ICO regulation in the United States has been in focus in recent months and KYC is becoming a requirement to ensure prospective investors can legally participate.

There are five main reasons why this makes sense.

Firstly, the US Securities and Exchange Commission (SEC) is reportedly preparing to prosecute ICOs which are held without KYC procedures. In fact, there have been cases where the SEC prosecutes and demands refunds for Token Sales that have not implemented KYC. In September, decentralized application Protostarr may have been the first token to cease operations due to communication from the SEC, signalling an intensification of regulatory scrutiny.

Secondly, cryptocurrency exchanges are beginning to exclude cryptocurrencies that did not properly implement KYC processes. Thus, not running such checks poses a long-term risk to a project. This month the Financial Times reported that New York Stock Exchange-backed GDAX says it “plans to list only a fraction of the hundreds of new digital coins that have been invented this year”.

Thirdly, if an ICO can demonstrate proper KYC then it will be possible for all parties to establish credibility with banks and follow Anti-Money Laundering regulations. Voluntary compliance thus gives a project and its participants a stamp of legitimacy with regulators and banks. This is the goal of DMarket’s proactive approach to KYC.

Fourthly, voluntary KYC compliance may help ICOs reach a larger global audience and expand the number of jurisdictions in which they can take place. Such compliance allows easier reach to investors in America, Britain, Canada and elsewhere. Even in the Isle of Man, which is seeking to become one of Europe’s most permissive regulatory regimes, KYC has been stated as a requirement by the island’s Department of Economic Development.

Fifthly, the US dollar remains the world’s reserve fiat currency and US regulators are not shy about punishing parties to any transaction that in any way uses a greenback. Even banks outside America treat US rules as inviolable as getting shut out of the dollar clearing system isn’t an option for any global bank.


Voluntarily complying with KYC regulations provides many advantages to the Offeror and its investors, even if they are not currently explicitly mandated to enact such a process.

An example of an ICO taking this proactive approach is SwissBorg, where “most of the team comes from the banking industry” and protecting investors and clients is paramount. Their KYC process is simple – the investor is requested to subscribe and give his personal information such as name, address and birthdate. He will then be asked to upload an official ID and proof of residency (such as official government letter). The investor’s personal information and identity proofs are then computed and compared to a legal database.

Such an approach is becoming the norm. Progressive ICOs utilize online identity verification to validate the investor’s identity. Ultimately, it’s in investors’ interest that KYC is carried out properly.

Last modified: May 20, 2020 9:17 PM UTC