US Becomes Costly For Crypto Startups, Kraken Receives 315 KYC Requests


On January 5, Kraken, a major crypto exchange that operates in the U.S. and Europe, revealed that it received 315 law enforcement requests from the U.S. authorities, up well over three-fold since the previous year.

More than 66 percent of all of the requests the company received came from the U.S. government, followed by the UK’s 61 requests.

Highly Inefficient and Costly For Crypto startups

All cryptocurrency exchanges and liquidity providers in the U.S. are required to implement strict Know Your Customer (KYC) and Anti-Money Laundering (AML) policies to assist the authorities in monitoring suspicious transactions.

For fiat-to-cryptocurrency exchanges, KYC and AML requirements are stricter because they have to deal with established financial institutions and banks when users file for deposits and withdrawals.

However, based on the discrepancy in the number of requests filed by the U.S. and other countries, it is fairly evident that exchanges in the U.S. are required to spend significantly more resources to abide by and comply with the demand from the authorities.

As the Kraken team said:

“Peek at our Compliance team’s 2018 Transparency Report. You can see why many businesses choose to block US users. Cost of handling subpoenas (regardless of licenses) is quickly becoming a barrier to entry. Inquiries up 3x YoY.”

Established cryptocurrency businesses in the likes of Kraken, Coinbase, and Gemini can handle such requests and allocate sufficient resources to repond to subpoenas. For small startups, the high volume of requests can be difficult to process as it requires both capital and a dedicated workforce to cooperate with the authorities.

In early 2017, Brian Armstrong, the CEO of Coinbase, disclosed that the company received a subpoena from the U.S. Internal Revenue Service (IRS) to hand over the details of millions of its customers for tax purposes.

To protect the privacy of its users, Coinbase fought back and tried to restrict the scope of the investigation of the IRS. Although the company achieved a partial victory over the IRS in November of the same year, Armstrong said at the time that the firm had to spend nearly $1 million to handle the situation.

“I also feel that this subpoena unfairly punishes Coinbase, one of the few digital currency companies that is both located in the United States and committed to compliance. We will likely incur a legal cost of between $100,000 and $1,000,000 in the process of defending our customers from this overly broad subpoena; funds which could be put to better use building innovative products or hiring more employees. This heavy handed approach by the IRS punishes one of the good guys,” Armstrong said in January 2017.

Bad Environment For Startups

Cryptocurrencies as an asset class is still at its infancy and the industry that supports it is undergoing a period of rapid growth.

Startups and large-scale companies have to scale quickly, addressing new waves of investors, users, and projects month after month.

The millions of dollars that are spent by startups to respond to law enforcement requests and to file for licenses such as New York’s BitLicense can be overwhelming at times and can restrict a startup’s ability to scale by investing in its employees, products, and expansion.

Crypto assets by nature are not anonymous and are traceable through public blockchain networks and blockchain explorer tools. Companies have started to work with analytics firms such as Chainalysis to prevent the utilization of consensus currencies by crime syndicates.

The overly aggressive approach of the U.S. authorities may hurt the growth rate of startups and even large-scale companies in the long run, especially if the discrepancy in the number of KYC and AML requests between the U.S. and other major regions increase exponentially on a yearly basis.

Featured Photo by Sharon McCutcheon on Unsplash


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Joseph Y

Joseph Yung is a financial analyst and investor who has worked in the cryptocurrency and technology sector since 2013. He's worked with leading publications within the cryptocurrency space, providing unique insights, interviews, market analysis, and technology coverage. You can contact Joseph at j@cryptomenow.com

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