Withdrawal access update please? Been waiting for 11 weeks since KYC.
If you’ve spent more than two minutes in the NBA Top Shot Discord channel (or any other Top Shot, Dapper Labs, or Flow social media channel), you have no doubt seen some variation of the above question. Some users ask politely, some . . . not so much.
So, what exactly is KYC? And what does it have to do with selling your momies to buy that sweet Lambo? As an attorney with over ten years of experience in banking, payments, and insurance compliance, I’m going to shed a little light on that topic for my NFT- and basketball-loving peeps.
Before I begin, here’s a spoiler about what this article does not contain. First, I’ll give the double-whammy of standard legal and crypto-enthusiast disclaimers: This is not legal advice nor is it financial advice. Do your own research. Second, I will be providing no information, tips, or assistance to help anyone avoid KYC requirements, identity verification checks, or any other anti-fraud or anti-money laundering measures. If that’s what you’re seeking, feel free to stop reading now (but please share the article with your more honest friends!).
To quote Top-Shot-podcasting trailblazer, L.G. Doucet at The First Mint, “I’m just a guy, at his house, who loves basketball and blockchain.” Let’s start with the basics . . .
What is KYC?
The acronym “KYC” stands for “Know Your Customer” (sometimes “Know Your Client”). In the United States, the genesis of rules and regulations mandating KYC for certain businesses dates back to the 1970s and the Bank Secrecy Act (BSA). The BSA established recordkeeping and reporting requirements for financial institutions and similar entities. These requirements were designed and implemented to deter money laundering.
In 2001, the PATRIOT Act amended portions of the BSA and placed certain requirements on financial institutions and similar entities to identify customers (i.e. “know” their customers) and share that information with law enforcement upon request. These requirements include preforming appropriate diligence in evaluating all customers and having an identity verification process in place. Again, these measures were designed, in part, to prevent and deter money laundering.
What is Money Laundering?
From an academic perspective, money laundering is the process by which the proceeds of a crime (such as drug trafficking or fraud) are moved through the financial system to disguise their unlawful origin and/or true ownership.
For a more palatable explanation, let’s use a standard Hollywood trope as an example. Imagine a successful organized crime enterprise sets up a number of small sandwich shops. “Dirty” funds acquired through the enterprise’s criminal activity are mixed with the “clean” (i.e. legitimate) funds that the sandwich shops make from paying customers. These funds can then be shifted from one bank account to another via various transactions, such as purchases and sales of equipment, loans, and payroll for employees. All of this money movement serves to obfuscate the original source of the funds and keep law enforcement off the trail of the criminals, which is the goal of the laundering scheme.
Financial institutions and related FinTech entities are generally very good at detecting and stopping financial crimes that affect their own bottom lines. In other words, crimes where the entity itself is the victim. This is good business. “Capitalism in action,” some might say. On the other hand, preventing a crime like money laundering doesn’t provide the same type of incentive to stop the bad behavior (outside of the altruistic motive to protect the integrity of the financial system). Money launderers can be great banking customers and in most cases will not negatively impact earnings at all. This is why governments have stepped in with legislation such as the BSA in the United States.
I can hear you asking me, “What the heck does all this have to do with NBA NFTs? Dapper Labs isn’t a bank!” Let’s continue . . .
The NBA Top Shot Marketplace
As Dapper Labs has made clear, one goal of Top Shot has always been to push for mainstream adoption of NFTs as a collectible. One key precursor of mass adoption by consumers that are not familiar (or comfortable) with cryptocurrencies is to allow for purchases in fiat currency via credit cards. Dapper has enabled credit card payments in Top Shot through their partnership with Circle, a FinTech company that provides payment processing solutions to businesses. This is why, in the support section of Dapper Lab’s website, they compare the Dapper on Flow (“Dapper Balance”) system to other “account and payment services” like “PayPal or [the] Steam wallet.”
As every DeFi advocate understands, accepting fiat currency comes with regulatory strings attached. In addition to any direct regulatory obligations that Dapper must meet, there are other contractual obligations passed to them by their partners, like Circle. Circle, in turn, has regulatory obligations passed to them via their partners, such as various financial institutions and the card networks (Visa and Mastercard). These details are very contract-specific (and I obviously don’t have access to those contracts), but in their roles as payment service providers, both Dapper and Circle would be required, at a minimum, to comply with the Anti-Money Laundering (AML) regulations promulgated under the BSA.
Identity Verification, Suspicious Transactions, and Withdrawals
So, what does this all look like in practice? Presumably to provide for a quicker and less burdensome sign-up process, Dapper has chosen not to perform their KYC during new customer boarding. Instead, identity verification occurs when an account hits a certain threshold of financial activity or when a user requests a withdrawal (whichever comes first). Until a user’s identity is successfully verified, Dapper Labs could be in breach of BSA/AML regulations if that user’s withdrawal was allowed.
In addition, Dapper Labs likely has transaction monitoring software that looks at all Dapper Balance and marketplace transactions and screens for suspicious activities. Many companies in the FinTech world offer transaction monitoring software and solutions like this to businesses like Dapper Labs. These solutions involve machine learning and AI technology that have the capability to analyze millions of transactions a day to find suspicious activity. However, as with any automated solution, there will always be “false positives.” After all, it is sometimes extremely difficult to tell if a suspicious-looking transaction is innocuous (e.g. the gifting of an expensive moment after an off-marketplace sale) or if the suspicious-looking transaction is indicative of money laundering (e.g. a group of related accounts setup to pass illicit funds from account-to-account via purchases and gifting). The only way to clear a suspicious transaction as a false positive is to submit it to manual review by a compliance analyst. These reviews are labor intensive and take time.
In recent days, members of the Top Shot community have done some sleuthing using tools like LiveToken and have pointed out some suspicious Top Shot transactions that may (key word: “may”) be indicative of fraud, botting, “multi-accounting,” or even money laundering (see Taylor Stein’s brilliant article, The VegasDave Heist, for one such example). Finding the suspicious transaction, however, is just the first step in the process. Determining if actual money laundering (or any other financial crime) is occurring requires a deeper dive by fraud and compliance experts. In my experience, this deeper dive can include freezing accounts and questioning users about specific transactions.
Members of the Dapper Labs team have freely admitted, in interviews and during Discord “Office Hours,” that they were not staffed to handle the large number of withdrawal requests that were received after the massive influx of new Top Shot sign-ups that began in late January. They have been adding staff (including BSA/AML compliance personnel) and have announced that they are chipping away at the backlog of withdrawals:
For those waiting to get withdrawal access, I understand that none of this is going to get you to your funds any quicker. Further, this article was not written to defend or excuse Dapper Labs. I completely understand the frustration of innocent users and feel it is warranted. My hope is that if you understand what is occurring behind the scenes and realize that you aren’t facing some type of arbitrary punishment, the light at the end of the tunnel might start to feel like it’s getting closer. If the recent withdrawal updates by the Top Shot team are any indication it certainly appears that it is.