The gap between traditional finance and the cryptocurrency world is still vast. However, up-and-coming solutions like Source of Funds checks can change that. Blockchain analytics and compliance companies are already looking into ways to legitimize users’ cryptocurrency assets and their origins for traditional financial institutions.
In January 2022, the European Parliament adopted a legislative measure to start tracing the source of digital assets in an effort to limit illicit funding entering the EU. This was a big step toward merging crypto and traditional finance. But what can individual traders and investors do to legitimize their crypto wealth? The answer lies in Source of Funds checks.
What is a Source of Funds check?
One of the main advantages blockchain technology offers is transparency and unprecedented traceability. Yet, banks are still far from accepting your transaction history as proof that your crypto assets were obtained legally and licitly. The reason for that lies in the anonymity aspect of distributed ledger technology. Your bank does not really know who these cryptocurrency wallets belong to. Therefore, they cannot verify the legitimacy of your assets.
This is where companies like Coinfirm come in and introduce detailed Source of Funds checks and reports. Coinfirm is a blockchain analytics company with a long-standing history in the space. Their latest product release is a dedicated Source of Funds report that allows customers to verify that their digital assets were licitly obtained, regardless of whether this happened through standard crypto operations like staking and liquidity mining or through direct purchases from centralized exchanges.
A Source of Funds check tracks all transactions coming in and out of a client’s cryptocurrency wallet and traces the original source of the funds. While one cannot expect a bank clerk to go through a customer’s crypto activity transaction by transaction, a report of this sort is beneficial when investors want to legitimize their crypto wealth.
Battling the “criminal activity” label
Unfortunately, the blockchain industry still suffers from the early-days stereotypes that connected all crypto assets to “criminal activity,” regardless of their origin. The space has evolved tremendously over the past decade, and more investors are turning to crypto to store their licitly obtained wealth. However, when the time comes to turn to a bank for a loan on a new property, for example, these funds are often rejected.
And while the road to mainstream adoption is long and riddled with pitfalls, solutions like Source of Funds checks are a step in the right direction. Despite the lingering misconceptions, more people are investing in cryptocurrency than ever.
According to recent research from The Harris Poll, 25% of all Americans own crypto assets, while one in five of those who have never owned cryptocurrency plan to invest by the end of 2022. This means that banks will have to start working out ways to accept cryptocurrency and digital assets as proof of wealth. Pawel Aleksander, CIO, and Co-founder of Coinfirm, also believes that next-level compliance is the way to achieve that:
“Forensic-grade investigation solutions are the perfect fit in the blockchain compliance ecosystem. As opposed to the traditional fiat system, compliance officers have real-time, accurate insight into the actual nature of funds and whether they originate from criminal activity.”
The crypto and TradFi merge
According to some industry pioneers, like DeFi platform Sturdy’s founder Sam Forman, the mass adoption of cryptocurrency and decentralized finance will reshape the space for the worse, taking it closer to the very system it was designed to disrupt. However, a common ground must be established as more people start utilizing the blockchain and crypto to store their wealth.
This is why companies like Coinfirm seek to establish Source of Funding solutions as the industry standard. With coverage of over 45 different blockchain protocols, a Source of Funds check from Coinfirm can easily encompass your crypto activity across the global ecosystem of products and platforms. Moreover, the company is actively reaching out and partnering with TradFi service providers willing to accept these reports as legitimate proof of wealth.
Bridging the gap between crypto and traditional finance is an uphill battle, but Coinfirm and other blockchain compliance companies are pushing hard. What remains to be seen is when and how TradFi institutions will start embracing the idea of legally obtained crypto wealth on a global scale.
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