Problem Statement Framing - sustany/dvg GitHub Wiki
Preface. More than ten years into the emergence of decentralized software systems – such as graphs and blockchains – participation in these networks is still limited to a small percentage of internet users. Moreover, most of this activity does not involve the use of the technology itself but is limited to speculation on blockchain-derived 'assets' such as coins and tokens, as well as limited numbers of non-fungible tokens - mostly taking on the form of digital collectibles. Aside from a minority of users earning these instruments via operating the required hard- and/or software as mining or staking reward, gift or compensation by a third party, most internet users acquire tokens or coins through purchase via fiat currency. In the absence of digital bearer instruments issued by a nation state (i.e., a central bank digital currency), users are largely limited to account-based transactions to pay for blockchain-derived assets.
Legacy Financial Systems. Today, account-based systems are maintained by licensed and regulated financial service providers (FSPs) – in particular commercial banks. FSPs are subject to the Bank Secrecy Act and its implementing regulations ("AML rules"). The ostensible objective of AML rules is in assisting in the detection, and reporting of suspicious activity including the predicate offenses to money laundering and terrorist financing, such as securities fraud and market manipulation. A subset of AML rules is the FSP’s obligation to elicit "essential" information to "knowing the customer" (the quotes are indeed in the FINRA Rules itself) , defined as facts required to (a) effectively service the customer's account, (b) act in accordance with any special handling instructions for the account, (c) understand the authority of each person acting on behalf of the customer, and (d) comply with applicable laws, regulations, and rules.
Account-Based Systems and KYC. As of today, the interpretation of the ‘KYC’ requirement by FSP’s maintaining account-based systems has taken on the form of extensive data collection of personal identifiable data, and verification of said data via government issued credentials before opening an account, regardless if any transactions are performed. In the United States this regularly includes the demand for a ‘social security number’ (SSN) a result of a narrow and excessive interpretation of the ‘Uniting and Strengthening America by Providing Appropriate Tools to Restrict, Intercept and Obstruct Terrorism Act of 2001’ - better known by its euphemistic marketing term ‘Patriot Act’. Albeit the text mentions SSN merely as one example of an “identification number”. And, there is indeed no requirement for foreign nationals or US citizens to ‘join the social security system’ at all.
Position of Custodial Exchanges in the ‘blockchain ecosystem’. Custodial exchanges (CE) share many characteristics with legacy account-based systems. And, while the technical participation of these companies in decentralized networks is minimal, they nevertheless serve today as important gateways for the blockchain ecosystem due to their public outreach and marketing efforts, as well as an important ‘off-ramp’ for cryptocurrency owners wishing to convert tokens or coins to fiat currency.
KYC and Crypto Exchanges. With few exceptions, custodial crypto exchanges as well as a number of non-custodial exchanges (often referred to as ‘decentralized exchanges’) have implemented KYC rules matching those of legacy FSPs. More recently the team at Shapeshift has reversed this trend, opting instead to aggregate a number of ‘decentralized exchanges’ for its service in order to avoid having to perform KYC. However, the overwhelming number of crypto exchanges require complete – often cumbersome – verification of users wanting to open new accounts. Throughout this glossary, identity - and its digital correlation - is reviewed from a first principles, science-based perspective, necessarily ignoring philosophical or ethical considerations, further omitting legal constructs that have culminated in some jurisdictions in concepts such as ‘corporate person hood’.