The cryptocurrency ecosystem emerged from the need to escape banks, their rules, and abuses, preferring a decentralized economy based on equity and anonymity.
This system does work and is understandably popular, but it’s also vulnerable to cybercrime and, importantly, it’s perceived as vulnerable to cybercrime by the authorities and by part of the public.
Without enough security to make the masses fully trust it, the global economy is unlikely to embrace crypto any time soon, and progress is stifled.
Though this is not currently always well-received, there is a lot to be said about implementing Know Your Customer (KYC) procedures. One could argue that implementing KYC checks could change this public perception, while boosting the safety and efficiency of the entire ecosystem – and keep legislators and other intervention far away.
Let’s explore how.
Crypto Already Embracing Official Mandates
As cryptocurrency continues to establish itself as a valid financial medium, more and more countries give it the attention it deserves, which includes formal regulations.
For starters, crypto exchanges must register with official bodies in their respective territories. Additionally, they must comply with any anti-money laundering (AML), combating the financing of terrorism (CFT), and KYC mandates in place, when and where they apply.
Many crypto startups around the world are already going through these steps because they want to keep their operations and customers safe. A great example is Bibox’s partnership with Nuvei for access to Simplex, financial software that allows smooth crypto and fiat transactions with KYC security.
In fact, several names in the crypto industry, such as Babel Finance, Nexo, and PARSIQ, are collaborating with KYC and AML companies to stave off fraudsters, monitor transactions and other activities, and ensure a seamless user experience. But there remain big challenges when it comes to KYC crypto security, like applying the right mandates, balancing identity checks and the friction they create, countering fake IDs, and, of course, convincing crypto fans that this is all a good idea.
Security Procedures to Complement the Crypto Ecosystem
KYC is a standard that aims to prevent illegal activity on online services, especially financial ones, by gathering customer information to verify their identity when they’re first creating an account.
The process asks for proof of identity, age, and address. Upon receiving the relevant documents via scan or video, the KYC check assesses if the person is legitimate and not a risk. Verification methods range from scans to video calls and to a detailed digital footprint analysis. Blockchain-based evaluations are gaining traction, too.
When it comes to crypto-related services, tightening security has been a wise move as cryptocurrency crime fell sharply between 2019 and 2020, the former year’s damages being 160% higher. 84% of 2020’s stolen funds were even recovered.
So, it’s worth integrating measures like KYC. AML legislation in particular, of which KYC is part, gives a clearer example of a prevalent crime in the digital world: money laundering. This a common type of concern in the crypto industry, considering the anonymity and lax regulations it delivers, at least compared to fiat systems.
What anti-money laundering checks do is monitor users with tools like KYC and customer due diligence (CDD), record information and activity, monitor transactions, and look for suspicious signs, often using AI and big data solutions to streamline their policing.
CDD is an acronym you’ll come across as much as KYC and AML. Its purpose is similar: verify a customer’s identity and keep records of information for future investigations. One key difference between CDD and KYC, though, is that the former is used regularly, not just when someone signs up.
Also, its information gathering goes beyond a name, address, and date of birth to include the person’s intentions and source of funds. In the traditional financial ecosystem, all of these security processes are important (and mandated) for every company at risk of exploitation, fraud, hacking, or worse.
The increased demand for CFT procedures is telling. These particular checks are designed to prevent terrorism by blocking its funding. The US has pushed since 2021 for the crypto market to apply anti-terrorism procedures and now sees related services slowly warm to the idea.
Such mandates involve monitoring customers and their financial activity, using efficient methods to catch any sign of fraud or links to terrorist entities. But the beauty of the crypto landscape’s blockchain structure is that it can make all of these processes so much easier.
They in turn can make cryptocurrency far more secure and reliable, inspiring the public to accept and adopt it in greater numbers.
Firms and Customers Benefit from KYC and AML Checks
As of November 2021, crypto statistics show that the total wallets worldwide amounted to 79.3 million, a growth of 1,271.97% since 2016. With over 8,000 cryptocurrencies around and counting, this is promising for the industry.
However, we have to admit crypto has an image problem when it comes to the general public. Media coverage and legitimate concerns alike link it to criminal activity, thus creating the false impression that cryptocurrencies and adjacent ventures are not legitimate, not trustworthy, or not of interest to non-criminals.
Perhaps more than anything, those not familiar with the sector wonder what measures are in place to protect individuals and companies, especially if they’re not tech experts themselves.
That’s where services with the necessary tools and knowledge to counter fraud, money laundering, account takeovers and all manner of cyber-attack can come in handy to both show everyday people that crypto can be trusted, and simultaneously discourage criminals and fraudsters.
This is a major reason why crypto firms are now using KYC and adjacent fraud prevention systems, while official mandates get more companies on board and provide specific guidance on what threats to look for and how to tackle them for the sake of an expanding industry.
Without greater peace of mind, the crypto ecosystem is unlikely to gain the massive public trust it needs to really take off and open more doors for companies and early adopters.
Cryptocurrency is on the brink of being embraced as a legitimate economic system, but it needs to make big changes in order to achieve that status.
With more and more collaborations like that between Binance Connect and Trust Wallet driving crypto adoption, a focus on improving the market’s defenses can only boost traction and convince people that cryptocurrency means business.
Understanding how KYC, AML, CDD, and similar processes can work in our favor could be key to making or breaking the crypto industry not just in terms of licensing in certain locales, but of adoption. After all, customers appreciate knowing that their funds are safe. It’s just a matter of communicating this clearly.
Author: Gergo Varga
Gergo Varga’s fight against fraud has been going strong since 2009. Working at various companies, he’s even co-founded a startup. Today, he serves as Content Evangelist at SEON, where he continues to disseminate his insight and expertise across the company and beyond. He has authored the Online Fraud Prevention Guide for Dummies and hundreds of other articles and guides. Based in Budapest, Gergo enjoys reading, tech and philosophy.
SEON is an online fraud prevention platform that detects and stops fraud in real time through transactional data analysis.
Founded in 2017, the company is headquartered in Budapest, Hungary.