Is bitcoin considered a verified source of funds?

Traded in peer-to-peer protocols, Bitcoin is the most reliable and reputable type of cryptocurrency. Due to its digital essence and recent introduction, bitcoin is still a myth to many. The main area of use of Bitcoin is in payments for goods and services, as well as a trading currency.

Picture: Crypto Crow

Using bitcoin as a source of funds is still comparably uncommon in the case of large investments; casting a shadow over the future of many start-up businesses. Although uncommon, no regulations or laws are limiting the use of bitcoin as a source of funds for large investments.

Table of contents

  1. Pros and cons of using Bitcoin as a source of fund

What is a source of funds?

Your source of funds is where your money derives. The money exchanged in transactions, be it fiat or cryptocurrency, must come from a legitimate source. To ensure that your funds do come from a reliable source, you could introduce your salary, company profits, and sold properties as the origin.

Why do you need to verify your source of funds?

All financial institutions need to abide by laws, meaning they will need to provide information and documents to regulatory offices. If you need to convert your money into fiat, buy goods, or receive services, you need to ensure financial institutions you have not engaged in any money-laundering activities.

Pros and cons of using Bitcoin as a source of fund

Pros

The slightly unexplored nature of Bitcoin makes it a less competitive currency for investment. Many companies are still skeptical of cryptocurrencies and refuse to include any crypto coins in their funds. Besides enterprises and large companies, many start-up businesses are eager to receive bitcoin as a source of funds.

Cons

Different from traditional currencies in many aspects, the risks associated with Bitcoins are also unique. The inconsistent price of Bitcoin and its liability to wide fluctuations are the main reasons many people do not regard it as a reliable source of funds.

Using bitcoin as a source of funds, you might go through large financial gains or losses in a short period. Based on the rates of exchanges, Bitcoin might skyrocket or crash in value in a matter of days. The sudden fluctuations in the price of bitcoin makes it an unsuitable asset for long-term investment.

Many companies accept bitcoin in limited amounts, therefore Bitcoin does not play a prime role in the success or the failure of the enterprise. But holding onto Bitcoin as a big chunk of your funds, might not be sensible.

The other downside to holding a large amount of bitcoins is that you will find few providers who will accept it. Even if you find a provider willing to receive bitcoins in exchange for services, the odds are that they will not get it for just any service.

How do regulatory offices regard bitcoin as a source of funds?

With the ever-evolving world of cryptocurrency exceeding beyond its boundaries and further into our lives, lawyers and regulators are struggling to come up with a proper legal model to suit the needs of cryptocurrency.

Anti-money laundering and countering the finance of terrorism (AML/CFT)

One of the most demanding yet significant tasks before you is to prove you have taken part in no money laundering activities, or have not financed terrorism in any form. Most companies demand evidence before they accept your subscription of becoming an investor in their funds.

It is sad to say that bitcoin and other cryptocurrencies do not boast an affirmative reputation before lawyers. The anonymous essence of Bitcoin makes it suitable for money launderers and terrorists to allocate their assets without anybody having a clue about it.

The cases of the Silk Road and WannaCry have manifested the facility of making business in any form on the bitcoin blockchain, terrifying regulators of the idea of dealing with it. If you have already attempted to use bitcoin as a source of funds, you might be aware that only an identity proof would not be enough.

Many companies and enterprises require you to provide evidence of your source of funds as well. In the case of investments in the form of fiat currency, the identification step might take longer than the time required for proving your source of money.

As it is, fiat subscriptions require a wire transfer from the subscriber’s bank account. As a legal organization, banks take their precaution regarding KYC research. Subject to strict laws and restrictions, banks examine the relevant wire details to approve the identity of the account holder.

In cryptocurrency requests though, verifying the source of funds is a critical issue. Although all requirements regarding subscription documents and KYC details might be available, verifying the source of the money is still a challenging task.

Although there is no comprehensive recipe for minimizing the risks regarding the verification of your source of fund, the following three points might help establish a better foundation to build on:

  1. All cryptocurrency payments should originate from a legitimate wallet and take place on a legal exchange website. Acknowledged wallets and exchange websites, provide KYC/AML services to refrain bitcoin holders from money-laundering activities and other illegal payments.

Korean banks check cryptocurrency account holders’ occupation and source of funds

With the popularity of cryptocurrency, banks will deal with bitcoins more often in the future. Banks and financial institutions also need to share account information if the amount has gone through corporate accounts.

The Korean government has issued a regulation, forcing cryptocurrency holders to exchange with their real names. The NH Nonghyup bank plans to provide virtual accounts for crypto holders. Claiming some cryptocurrency websites utilize corporate or executive accounts for withdrawing money, many officials insist on the need for virtual bank accounts.

Affiliating the use of corporate accounts to concealment activities, authorities are keen to strengthen anti-money laundering protocols. Currently, Korean banks provide customer due diligence (CDD), but under new laws, they will have to go through an enhanced due diligence (EDD). Enhanced due diligence, helps identify high-risk customers to prevent money laundering activities.

In CDD, the routine was to ask for a name, address, and contact number. However, in EDD, customers need to provide the bank with their occupation, purpose of transactions, and source of their assets. In case customers refrain from providing the necessary information, they will not receive any further services from banks.

Let us say you earn Bitcoin from your work, what is the common procedure you are going to face when proving your source of funds?

According to “bitpanda”, a Proof of Funds (POF) is a document or a collection of documents showing where your financial resources come from. The Proof of Funds is also necessary when you want to withdraw funds in the form of fiat currency:

Let us say you have purchased Bitcoin on an exchange website, you will need the following:

  • A screenshot of your purchase and withdrawal confirmation, which also includes your account ID and transaction data

If you have made profits by trading cryptocurrency on other exchange websites and brokers:

  • Screenshots of the transaction details which display the profits made

In case you earn bitcoin in return for services, you will need to provide the following information:

  • A comprehensive description of the service you have earned Bitcoins in return for

Initial Coin Offering (ICO) and token sales

  • If you earned bitcoins in return for tokens, you need to submit a copy of the contract confirming payment was in Bitcoin

Wrapping up

The only value bitcoin offers comes from the possibility to exchange with other goods and services. If not a reliable source of funds, how much bitcoin you own will be of no importance. Abiding by the rules and regulations of financial institutions and banks enable you to convert bitcoin for fiat currency and spend it as you wish.

The sharp fluctuations in the price of bitcoin decrease its reliability as a source of funds. If you receive bitcoin as a source of funds, it is better that you immediately convert it into fiat currency.

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