IPO or ICO: Initial Coin Offering requirements are changing with SEC regulations


KYC is making ICOs dangerous for investors. The general consensus is that KYC is safe however, the truth is exactly opposite of that. Last year, Securities and Exchange Commission in the United States analyzed a lot of ICOs for failing to perform proper due diligence. Ever since then, most of the ICOs have been collecting the KYC information from the investors in order to conduct the due diligence process.

Know your customer. Know your customer (‘KYC’) is the process of a business identifying and verifying the identity of its clients. The term is also used to refer to the bank and anti-money laundering regulations which governs these activities.

These days, if you want to participate in the ICO, you would have to submit your ID as well as a bank statement. In addition to that, some of the ICOs would even ask you to submit address proof as well. Moreover, you would be required to submit information required for your background check.

According to bitcoin.com, this is resulting in a lot of investors being rejected from ICO participation. This is particularly true for oversubscribed ICOs like Arcblock. The problem is that even though this is ushering in transparency but it is also increasing the risk of participating in an ICO.

Data leak:

The problem is that the documents of the data which you upload on the ICO website are not entirely safe. Even though the companies launching the ICOs are taking the right steps to protect is data but it is far from being safe.

A prime example of this is the Sentinel ICO. A user of this ICO was able to access the files which are uploaded by the other users. This means that the passport scans, as well as other identity proof scans, were exposed to do another user. The company launching the ICO went further by filing a criminal complaint with the police against that user. The user had not taken any extra step to access the documents. Thus, the user was not at fault as well.

Is KYC really good?

The truth is KYC is good for the companies which are launching the ICOs. On the other hand, for the investors, it is not a good proposition. The reason why it is not a good proposition for the investors includes:

  • Approval process for ICOs is delayed
  • Rejection rates are high
  • Risk of the data being leaked is pretty high

On the other hand, the companies launching the ICO’s are able to easily be on the right side of law since they are collecting the information about the investors as mandated by the various authorities all over the world.

It is high time that this old dated system is updated to benefit both, the investors as well as the company launching the ICO.

Why KYC is needed for ICO?

Here is another point from CNN:

Five Reasons Why KYC Is Crucial for Your ICO Investment

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.

Adam Webb is editor in Smartereum, blockchain and currency news, where he produces updates on Blockchain, Ethereum and other alternative cryptocurrencies.


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