Know-Your-Customer (KYC) Requirements for Initial Coin Offerings
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RESEARCH PAPER
Know-Your-Customer (KYC) Requirements for Initial Coin Offerings Toward Designing a Compliant-by-Design KYC-System Based on Blockchain Technology Nadine Kathrin Ostern • Johannes Riedel
Received: 14 August 2019 / Accepted: 21 September 2020 Ó The Author(s) 2020
Abstract Blockchain technology is often proposed as an infrastructure for decentralized Know-Your-Customer (KYC) verification, i.e., a process determining whether a customer is eligible for a given transaction. The benefit of using blockchain technology lies in the expected compliance costs reduction for companies by automatically enforcing KYC-requirements, whose results are accessible by multiple financial institutions. While information systems researchers have proposed conceptual models and prototypes of blockchain-based KYC-systems, they do not yet consider severe penalties that are applicable to companies if KYC-requirements are not met. Hence, if the legal requirements for KYC-processes cannot be met, these systems are not applicable. The paper uses an objectivecentered design science research approach to develop a blockchain-based KYC-system for the conduct of ICOs that is compliant-by-design. To this end, the authors first identify existing KYC-requirements and define corresponding system design objectives that are used to develop a KYC-system that automatically enforces KYC-regulations, thereby preventing money laundering and other
Accepted after two revisions by Jo¨rg Becker.
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s12599-020-00677-6) contains supplementary material, which is available to authorized users. N. K. Ostern (&) Frankfurt School of Finance and Management, Adickesallee 32-34, 60323 Frankfurt, Germany e-mail: [email protected] J. Riedel Technical University Darmstadt, Mornewegstraße 23a, 64293 Darmstadt, Germany e-mail: [email protected]
forms of identity fraud. Second, the authors contribute to the literature by providing a blueprint for compliant-bydesign blockchain-based KYC-systems, in the paper, integrated into the investment flow of an ICO. Third, the authors propose a KYC-system that is applicable in the real world, by making – due to legal certainty – KYC-processes cost-effective, i.e., the proposed blockchain-based KYCsystem expectably reduces compliance costs for customers and financial organizations. Keywords Blockchain Distributed ledger Know-yourcustomer Anti-money-laundering Initial coin offering Compliance-by-design Design science research
1 Introduction Initial coin offerings (ICOs) constitute a novel mechanism, typically used for the funding of highly innovative ventures that issue and sell virtual tokens to a crowd of investors (Fisch 2019). While ICOs share similarities with conventional crowdfunding, the differentiating feature is the use of blockchain technology, providing a decentralized database and a distributed software architecture that enables the direct exchange of money against tokens without the need of finan
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