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Illustration: Christopher T. Fong/Protocol

KYC is a challenge for crypto. Blockchain may be the solution.

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Thursday: crypto KYC on the blockchain, David Solomon’s DJ gigs, and the unlikely return of Zuck Bucks.

Off the chain

Miami’s claim to be a crypto financial center has a 3,000-pound symbol: an updated version of the Wall Street bull with glowing laser eyes. It’s a little bit “RoboCop” and a little bit “Alien” and a little bit eye-roll-inducing, but I don’t know if it’s the worst thing in the world. Unveiled for Bitcoin Week, the bull will permanently reside on the campus of Miami Dade College. The city’s real future will be built there: Without a steady flow of capable technical graduates, Miami’s crypto sector will flounder.

— Owen Thomas (email | twitter)

Know your (crypto) customer

Cryptocurrency is known for its inherent anonymity, a feature which threatens regulated financial institutions required to know their customers. But there’s actually no contradiction between crypto and KYC compliance. In fact, blockchain could revolutionize customer identity protocols in a way that’s compatible for all.

Last February, a group of major crypto companies, led by Circle and Coinbase, introduced a digital identity protocol designed for blockchains, Verite, which promises to comply with standard “know your customer” requirements while letting users have “self-sovereign control over their identity.”

KYC exists for a reason. Fighting money laundering and preventing the financing of terrorism require checking IDs.

  • In conventional banking, KYC benefits financial institutions, too. Banks don’t want to serve criminals and scammers.
  • Cryptocurrency, though, is built on a trustless basis, which means you don’t need to know who someone is to have confidence in a transaction.
  • There’s another twist in crypto: Because crypto transactions are traceable and trackable on the blockchain, breaking crypto’s anonymity can mean destroying users’ financial privacy. Crypto exchanges that keep KYC data on customers are attractive targets for hackers as a result.

There’s no reason KYC can’t be built on the blockchain. In fact, doing so has some unique advantages.

  • For financial institutions, KYC isn’t just one thing. It includes identity verification upfront when onboarding a new customer, persistent customer monitoring and ongoing screening as sanctions lists and other sources of information get updated.
  • Tony Peccatiello and Suzanne Elovic of Parallel Markets recently proposed a system where participants load their personally identifiable information in encrypted form onto the blockchain, unlocking it for financial institutions. Monitoring and screening could happen similarly, with periodic reviews confirmed by authorities and results of these checks likewise stored on the blockchain.
  • That proposal sounds a lot like Verite, which layers identity with cryptographic proof that is visible only to those authorized to check credentials.

Privacy coins, mixers and tumblers could complicate things. Technology is always evolving.

  • Some privacy coins seek to obscure blockchain transactions by fabricating addresses, scrambling wallets or jumbling transactions together. Tumblers and mixers accomplish some of the same things for protocols that don’t have privacy features built in. But even the most private of cryptocurrency transactions can be traced on the ledger.
  • There’s also the conundrum of decentralized exchanges. These open, trustless, permissionless systems operate on a buyer-beware basis, and implementing KYC may be more difficult for them.
  • Crypto’s usefulness for everyday payments remains limited. Converting crypto to fiat and back again creates weak points where investigators can link accounts to identities.

Crypto KYC can happen. And the industry seems increasingly on board. The backers of Verite and other industry-proposed solutions see putting KYC on the blockchain as a far better outcome than retrofitting slow, costly, conventional KYC for cryptocurrencies. The challenge may be educating consumers on how to maintain and secure their own identities. Already, hackers have shown a lot of interest in phishing crypto customers. Knowing your customer is one thing; the next challenge is knowing if your customer is really your customer.

— Leah Zitter (email | twitter)


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On the money

On Protocol: Binance.US raised $200 million in a seed funding round, putting its valuation at $4.5 billion. The next step, Wall Street chatter has it, could be an IPO for the crypto exchange’s American unit.

Meta is taking another swing at virtual currencies. Called “Zuck Bucks” internally, a non-crypto token could be used in virtual reality environments, the Financial Times reports. This is sure to give anyone who dealt with Facebook Credits a decade ago flashbacks. Meta is also considering a “creator coin” for Instagram. The only problem: Its financial unit has seen a mass exodus of employees after the Diem crypto project flopped.

BitPay added support for Lightning Network payments. This means BitPay merchants can accept bitcoin payments from Lightning-enabled wallets like Block’s Cash App as well as Strike, so faster, cheaper bitcoin payments could become more common.

Also on Protocol: Sky Mavis, owner of Axie Infinity, raised over $150 million in funding to bolster its balance sheet as it plans to reimburse users affected by the $625 million hack last week. The funding round was led by Binance, with participation from a16z, Animoca Brands, Paradigm and Accel.

Zelle is coming for Visa and Mastercard. Big banks are reportedly considering bringing Zelle to retail, making it a payment option in stores and bringing it directly in competition with card-network giants Visa and Mastercard.

A new round of U.S. sanctions is hitting Russia and its biggest bank, Sberbank. The sanctions include banning Americans from investing in Russia, and individual sanctions on Putin’s two daughters, Russian Foreign Minister Sergei Lavrov's wife and daughter, and senior members of Russia's security council.

El Salvadoran president Nayib Bukele pulled out of Miami’s Bitcoin 2022. A notorious champion of bitcoin himself, the El Salvadoran president had to pull out of participating at the last minute due to “unforeseen circumstances.”


Blockchain critic Jamie Dimon is admitting that DeFi is real, that neobanks are outperforming traditional big banks and that you need to be prepared for this trend to continue. “It seems unlikely to me that all the banks, shadow banks and fintech companies will thrive as they strive to take share from each other over the next decade,” the JPMorgan Chase CEO warned in his must-read letter to shareholders.

Goldman Sachs CEO David Solomon DJs on the side, and was recently booked for Lollapalooza. But is he any good? Some in the DJ community don’t think so. Matt Black, a British DJ and half of music duo Coldcut, called Solomon’s music“generic McDance” and said his Lollapalooza booking was “in poor taste.”

Sushil Kumar Modi, a member of India's Parliament, wants to raise crypto taxes to 50%, up from 30%. “We have given time to younger people who want to exit (cryptos). Those who want to remain will have to contend with higher taxes because it is like gambling,” he said in an interview with Forkast.

Moves and hires

Max Bronstein joined Synapse as chief operating officer. Bronstein was previously part of the institutional coverage team at Coinbase Ventures and a business development manager at Dharma’s lending desk team prior to that.

Chris Janczewski joined TRM Labs as head of Global Investigations. Janczewski was special agent at the IRS for criminal investigations, most notably as lead agent for the Bitfinex hack investigation.

Mastercard appointed Chad Wallace as executive vice president for B2B Solutions. Wallace was Goldman Sachs’ head of Digital, and was previously head of Digital Experiences for the Commercial Bank at Capital One.

U GRO Capital appointed Smita Aggarwal as additional independent director. Aggarwal is also an independent director at IIFL Asset Management Company, and a global investments adviser at Flourish Ventures.

Chainlink Labs appointed Dahlia Malkhi as chief research officer. Malkhi was formerly chief technology officer at the Diem Association and a lead researcher at Novi.

MX named Kimberly Cassady as chief people officer. Cassady was previously chief talent officer at Cornerstone OnDemand for a decade.


Get ready to live stream Plaid Forum 2022 on May 19. Join the world’s leading companies and build the future of digital finance. Registration is now open!

Learn more

Thanks for reading — see you tomorrow!

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