Opinion | Why it is inevitable that the stablecoin introduces the KYC program

Antony Lewis recently published a useful article on stablecoins in which he describes a concept of "permissioned pseudonymity". In traditional payment systems, people can only obtain payment services after opening an account, which requires them to provide proper identification, so these systems are not anonymous, and their use and personal identity are linked.

On the other hand, stablecoin operators will cut off this link, and users can transfer stablecoins to other users without providing personal information (that is, someone can pay someone without asking any questions). Antony calls it semi-anonymous, which means that regulators allow semi-anonymous use of the stablecoin network.


The above payment is an example of "permit semi-anonymous". This is a $ 30 million transfer that is made between two unnamed wallets via the USD Coin stablecoin network. Centre, the operator of the network, may not know who is making the transfer.

I really want to know when regulators will ban semi-anonymous use of stablecoins.

FATF regulation is technology-neutral, and stablecoins are difficult to exempt

In fact, most of the rules governing payments come from the Financial Action Task Force (FATF), a global committee of regulators that meets at regular intervals to determine how to combat money laundering And financing of terrorist financing. FATF guidelines are revised by local regulators in each country, and FATF monitors related compliance.

FATF regulations should be technology neutral. In short, the same principles apply to new and existing technologies. This makes sense, and we may not want regulators to pick winners and losers by setting a set of requirements for AE and FJ companies, respectively. Competition for market dominance only begins after they obey the same rules.

So far, FATF has not given much talk about stablecoins (only issued a risk reminder and then mentioned that the risks of global stablecoins will be reported to the G20 finance ministers and central bank governors in 2020 ). But what we can be sure of is that there are some things going on that may not be good for stablecoin operators. The problem is that granting a stablecoin operator a license to be semi-anonymous is contradictory to technology neutrality, which sets out a set of bank account standards and another set of stablecoin standards.

The bank has an obligation to collect personal information from all account holders. If two people transfer $ 30 million through a bank payment network, we can be sure that the bank that manages these accounts will collect personal information related to the transaction.


Why are stablecoins like USDC and PAX exempt from this business?

Antony suggests that stablecoins are eligible for exemptions as they address regulatory concerns in other reasonable ways. Because stablecoins use blockchain technology, and the blockchain records all transactions involved, we can track and monitor the information trails left by stablecoin users to find suspicious activity. The stablecoin issuer can then toggle a termination switch and freeze potentially dangerous addresses.

This makes sense. But if stablecoin issuers can avoid identifying their customers by implementing monitoring and freezing processes, then in my opinion, existing technologies (bank accounts) should also get the same opportunity. After all, account-based systems can also track and freeze like stablecoins.

For example, Citibank wants to set up its own semi-anonymous account payment network and call it Citibank HushAccounts. Customers can open HushAccount without providing personal information. They can then use the HushAccount network to make transfer transactions with other account holders in a semi-anonymous manner. Citi bankers monitor HushAccount's transaction patterns and then freeze any seemingly strange transactions. Only when users want to cash out from the HushAccounts system, they need to provide personal information.

But in fact, we clearly know that Citibank cannot implement HushAccounts, which is actually illegal. This underscores my technically neutral point of view. Why can a stable coin like USD Coin be allowed to be used anonymously while Citibank cannot?

Let me put it another way, if a stablecoin issuer can escape the penalty of not charging a user ID, then Citibank will make some superficial changes to its traditional account-based system, making it some kind of stablecoin blockchain product. Now, it does not need to collect so much information about customers, it can also fire a group of compliance personnel, and then other banks will follow suit, and soon we will achieve ultra-stable monetization. Every bank account is converted into a stablecoin.

However, FATF regulations should not be biased towards any one technology.

Therefore, in order to maintain neutrality, I am not surprised that regulators have called for the semi-anonymous use of stablecoins.

In other words, stablecoin issuers can only provide addresses to people who pass some kind of "KYC" process.


Stablecoin may also be restricted like prepaid debit cards

Of course, there is a second possibility. As Antony pointed out, there is a significant regulatory exception in the payments space. In many parts of the world, people can buy a prepaid debit card (or electronic money in Europe) without having to provide any identification. This provides cardholders with semi-anonymous access to Visa or MasterCard networks. I have written these cards before, and you can also browse my articles on Sound Money.

Like prepaid debit cards, stablecoins may also receive their own exemptions.

But the reality is that regulators have set very low limits on the amount of semi-anonymous use of prepaid cards or electronic money wallets. In the United States, for example, this limit is only $ 1,000 (and in Europe, only € 150). Anyone who exceeds this standard must submit proof of identity. In addition, there are other restrictions. In the United States, these prepaid cards must not be reloadable, and people cannot use it to make interpersonal payments on ATMs, and they cannot be used for international purchase transactions. This makes the scale of such payment products very limited.

Regulators believe that by lowering the cap for semi-anonymous prepayment and reducing the features provided by payment cards, they can achieve two things:

  1. Minimize the risk of money laundering and the financing of terrorism;
  2. Those who do not have a bank account and identity card can still access the retail payment system;

If FATF allows stablecoins to provide limited anonymity, their payment caps may be quite low, just like prepaid debit cards, and peer-to-peer payments like $ 30 million are unlikely to be allowed. The possible amount is only 20-2000 USD. After all, it is difficult to reasonably explain that people who do not provide identification and then go for stablecoin transactions worth millions or even tens of millions of dollars.

I should point out here that I am not a fan of FATF (its mission is to uncover every transaction). I have written a lot about the benefits of financial anonymity. Many smart people have also mentioned the cost of implementing anti-money laundering regulations. Much more than any benefit it provides. But what I want to say is that in the current form, I don't think people will be able to use the stablecoin semi-anonymously for too long, and its use will either be completely banned or a very low upper limit set. .