CONTENTS

• What are the challenges faced by crypto exchanges without KYC?
• The KYC Landscape in Crypto Exchanges
• KYC Builds Trust and Lowers the Risk of Transparency
• Benefits of KYC in Crypto Exchanges
• Overview of Crypto Exchanges in 2023
• The Role of KYC Solution Providers in Securing Crypto Exchanges
• Unlocking Efficiency with IDMERIT

What are the Challenges Faced by Crypto Exchanges Without KYC?

Before the widespread adoption of KYC in the cryptocurrency industry, there were several challenges:

1. Possibility of increasing Fraud: Cryptocurrencies, in their early days, offered a high degree of anonymity. While this was seen as a benefit by many, it also attracted individuals involved in illegal activities such as money laundering and fraud.
2. Reputation Risks: The association of cryptocurrencies with illegal activities tarnished their reputation. Trust and acceptance in the broader financial ecosystem were hindered, slowing down mainstream adoption.
3. Financial Risks: Without robust KYC solutions, financial risks and scams increase. Financial criminals who wanted to commit fraud were often attracted to crypto exchanges with no transparency or accountability. This led to financial losses.
4. Security Threats: The absence of KYC measures has made cryptocurrency exchanges more susceptible to hacking and cyber threats. These vulnerabilities resulted in significant losses for both users and platforms.

The KYC Landscape in Crypto Exchanges

KYC in crypto exchanges refers to the process of verifying the identity of users. It’s a robust mechanism that helps crypto platforms establish the real-world identities of their customers. The primary goal is to prevent fraudulent activities and to create a secure environment for trading digital assets.

To implement KYC effectively, crypto exchanges often turn to KYC solution providers. These solution providers offer a suite of services tailored to the unique needs of the cryptocurrency industry. By collaborating with these experts, crypto exchanges can streamline the onboarding process, enhance security, and reduce the risk with financial regulations. Below is how KYC solutions unlock the power in crypto exchanges:

1. User Verification: KYC solution providers use a variety of methods, including document verification and facial recognition, to ensure users are who they claim to be.
2. Risk Mitigation: By assessing user-profiles and tracking their activities, KYC solutions help exchanges identify high-risk individuals or entities. This proactive approach reduces the potential for financial crimes.
3. Enhanced Security: By implementing robust identity verification, crypto exchanges protect themselves and their users from security breaches and unauthorised access.

KYC Builds Trust and Lowers the Risk of Transparency

Financial misconduct, spanning a spectrum of illicit activities such as tax evasion, bribery, graft, financing of terrorism, and cyber intrusions into online banking systems, imposes an annual financial burden of approximately $1.4 to $3.5 trillion globally, with an estimated $2 trillion channelled through the laundering process.

Notably, crypto exchanges stand as susceptible targets, experiencing losses amounting to $4.26 billion in 2019 alone. The integration of Know Your Customer protocols within the realm of cryptocurrency and crypto exchange platforms can play a pivotal role in the identification and authentication of users, thereby diminishing the risk of financial crime and unauthorised operations.

Benefits of KYC in Crypto Exchanges

Implementing KYC solutions in crypto exchanges brings a multitude of benefits. These include:

1. Enhanced Trust: Users are more likely to trust and engage with exchanges that prioritise security and trust. KYC solutions make the decision-making process easy on the basis of identity verification.
2. Reduced Fraud: KYC solutions act as a deterrent to fraudsters and significantly reduce the incidence of fraudulent activities.
3. Combating Money Laundering: KYC & AML solutions help crypto exchanges avoid hefty fines and reputational damage. These solutions help in recognizing people involved in money laundering and terrorism financing.
4. Reduced Operational Costs: Automated KYC processes streamline user onboarding and reduce the need for manual verifications, cutting operational costs.
5. Global Expansion: Crypto Exchanges that prioritise KYC can expand to more countries by demonstrating a commitment to international regulations.

Overview of Crypto Exchanges in 2023

In 2023, cryptocurrency prices demonstrated remarkable resilience, especially considering that both Bitcoin and Ethereum had their worst annual performances in 2018. Despite a relatively unexciting performance in September, Bitcoin prices have surged by 63.3% year-to-date, while Ethereum prices have increased by 40.2%.

According to the most recent research conducted by Coinfirm, it has come to light that 69% of the 216 crypto-related businesses under scrutiny do not possess “comprehensive and transparent” KYC solutions, a critical component of their AML initiatives.

A separate report from CipherTrace further underscores this concern, indicating that among the top 120 crypto exchanges, one-third exhibit subpar KYC processes, and two-thirds are deficient in maintaining robust KYC policies.

The Role of KYC Solution Providers in Securing Crypto Exchanges

KYC solution providers help to authenticate business identities for crypto industries. They offer a range of services that encompass identity verification. The following identity verification methods are essential for crypto exchanges to stay secure and stable:

1. Document Verification: KYC solution providers enable exchanges to verify the authenticity of identity documents, such as passports and driver’s licences.
2. Biometric Authentication: Facial recognition technology ensures that the person submitting the documents is the same as the one in the ID.
3. Watchlist Screening: KYC solution providers allow exchanges to check users against global watchlists, identifying politically exposed persons (PEPs) and other high-risk individuals.
4. Ongoing Monitoring: Regularly updated profiles and transaction monitoring help exchanges identify changes in user behaviour that may indicate illicit activities.

Unlocking Efficiency with IDMERIT

There are several key strategies through which a crypto management platform can enhance security:

• Advanced identity verification
• Efficient onboarding process
• Ongoing monitoring
• Risk assessment tools

IDMERIT provides robust identity verification and Know Your Customer solutions. After harnessing these identity verification solutions, you’ll be able to manage custom workflows tailored to different usage scenarios and incorporate a range of verification methods to align with KYC methods. As a result, we not only guide in maximising conversion rate but also significantly enhance the efficiency of the verification pipeline.

If you’re interested in discovering how IDMERIT can assist you in achieving identity trust and security for your cryptocurrency exchange, please don’t hesitate to get in touch with us or join our community for a direct conversation with our product team. We’re here to engage in a discussion with you!

The post A Comprehensive Guide of KYC in Crypto Exchanges in 2023 appeared first on IDMERIT.

How Does AML apply to Crypto?

Cryptocurrency advancement and its affiliations with financial crimes go hand in hand. Anti-Money Laundering (AML) in crypto is continuously evolving for its complex digital nature; criminals heavily exploit cryptocurrencies for bribery, corruption, narcotics trafficking, and ML-TF activities. Recently, cryptocurrencies have become the most sought-after method for miscreants who scheme to convert illegal crypto proceeds to fiat currencies. Other potential cryptocurrency money laundering threats involve online scams, ransomware, human trafficking, dark web activities, and sanctions or PEP watchlists evasions.

Different nations and international organizations have introduced crypto AML regulations to help the crypto industry combat financial crimes. Additionally, many nations have even banned crypto mining and put stricter vigilance on crypto exchange activities. An increasing number of nations have also merged the FATF Crypto Travel Rule within their AML regulations for cryptocurrencies. However, the regulations in the field of AML for crypto firms are still in their nascent stage.

Anti-Money Laundering and Crypto Regulations

Cryptocurrency Regulations in the U.S.

In the United States, cryptocurrencies are not yet defined as legal tender by its major AML-CFT standards-setting body, the Financial Crimes Enforcement Network (FinCEN). All state-approved cryptos are called “other value that substitutes for currency”. The BSA guidelines and registration with the FinCEN are the two important crypto regulations in the USA that all cryptocurrencies and Virtual Assets Service Providers (VASPs) must abide by and remain updated with.

The U.S. FinCEN AML-CFT Program – on crypto plus VASP- summarizes every aspect of AML-CFT, i.e., Know Your Customer (KYC), Currency Transaction Report (CTR), Suspicious Activity Report (SAR), Suspicious Transaction Report (STR), and Customer Due Diligence (CDD). The FinCEN is very particular about its June 2019 Travel Rule that mandates VASPs to maintain crypto CTR, SAR, and STR records and simultaneously report transactions crossing standard thresholds. For the crypto exchanges, the threshold is 10,000 USD.

The Securities and Exchange Commission (SEC) mentions that Cryptocurrencies are securities just like digital wallets. On the other hand, there is free trade for crypto derivatives, as mentioned by the Commodities Futures Trading Commission (CFTC).

The Office of Foreign Asset Control (OFAC), the U.S. statutory body on sanctions compliance, asserts mandatory screening against all virtual currency transactions, failing which the transaction must be blocked off instantly. FinCEN and OFAC applaud the Financial Action Task Force (FATF) Travel Rule regulation for scrutinizing cross-border crypto payments and anonymity in transactions.

Cryptocurrency Regulations in the U.K.

The Financial Conduct Authority (FCA) is the main AML-CFT body for cryptocurrency measures in the United Kingdom. All the Virtual Asset Service Providers (VASPs) must be registered with the FCA. Cryptocurrencies are not yet considered legal tender, and all crypto trading platforms are expected to follow the U.K. crypto regulations. As part of its AML-CFT measures, the FCA focuses on Identity Verifications of the crypto users and guides the exchanges against negligence while detecting anonymity in crypto transactions. The regulatory body puts unrelenting measures on Know Your Customer (KYC) and Customer Due Diligence (CDD) activities for combating terrorism as terrorists increasingly adopt new channels for the proliferation of weapons. Especially for those involved in high-risk crypto trading activities must be screened against sanctions, PEP, and adverse media lists.

All crypto-trading taxable earnings as defined by the Her Majesty’s Revenue and Customs (HMRC) in the U.K. Whether in the form of trading, investments, or Initial Coin Offerings (ICOs), all crypto activities in the U.K. come under the scope of AML-CFT regulations and are subject to transaction monitoring and record keeping.

International Regulations on Cryptocurrencies

The Financial Action Task Force (FATF) Recommendation 16 on DeFi cryptocurrencies has introduced stringent identity verification measures for crypto users and beneficiaries.  The FATF Crypto Travel Rule for the VASPs emphasizes maintaining the correct identification of the crypto users, including originators and beneficiaries. The FATF Recommendation 16 asks the VASPs to maintain and update the user’s Personally Identifiable Information (PII). The user database should be easily retrieved while investigating the Suspicious Activity Report (SAR) in any transaction exceeding the 1000 USD threshold. The FATF also propagates well-established subpoena laws while examining Suspicious Transactions Reports (SARs) for cryptos. An important FATF measure includes blocking crypto payments from sanctioned nations, individuals, or groups.

The 5th European Directive on Money Laundering 2015 mentions video-based identification, biometric authentication, and KYC verifications of crypto users. The 5AMLD says VASPs and crypto wallets follow the same AML-CFT measures as other regulated institutions. The Financial Intelligence Units (FIUs) of the member nations hold the right to authenticate the KYC documents of the crypto users from the crypto exchanges and crypto wallet companies.

How cryptocurrency can disrupt the fiat mode of trading and payments

• With easy conversions from fiat-to-crypto and crypto-to-fiat on popular exchanges, users are spared from exorbitant trading and transaction fees to buy popular cryptos. Buyers can also easily access cryptos on crypto POS terminals, pay cash and buy cryptos with much lesser transaction fees.
• The cryptocurrency debit card has amplified crypto potential in the trading system and has brought a revolutionary change in breaking the ‘asset-like’ image of these virtual currencies. eCommerce platforms have welcomed this disruption in payment systems for online shopping and utility and restaurant bill payments.
• There has been a significant decrease in crypto trading fees, with easy wallet-to-exchange syncing. Buying and trading on cryptocurrencies have been made super easy with these new technologies in the digital currency industry.
• With multiple authentication methods, holding crypto wallets for investors/traders has become more secure. Trading on exchanges and syncing the account with wallets is no longer time-consuming. It doesn’t require extra trading/transfer fees or excessive loading charges.
• For off-chain and on-chain transactions, the exchanges have buyer-seller agreements to meet the risk regulations. Crypto payment exchanges offer instant, fraud and chargeback-free transactions.
• Today’s payment gateways offer B2C crypto transactions with relatively less recurrent fees. The gateways support fiat and crypto payment modes, integrated with multiple cryptocurrency coins and tokens.

AML Transaction Monitoring in the Crypto Industry

There are various intricacies involved with Crypto AML Regulations; the biggest and the most difficult to address is the traceability of the transactions, as customer onboarding and customer relationships are completely non-face-to-face; digital currency promotes anonymous funding and anonymous cross-border transfers.  However, recently major crypto exchanges have fortified their onboarding identity verification security process of the users and their risk-based due diligence and continuous monitoring to withhold unverified suspicious transactions.

The non-face-to-face methods for VASPs and crypto wallet onboarding make cryptocurrencies a considerable high-risk business. Regulated businesses are advised to operate crypto AML Transaction Monitoring Software to combat money laundering and terrorism financing-related threats.

IDMerit extends state-of-art crypto AML Transaction Monitoring Solutions to crypto exchanges worldwide. Contact our Crypto AML Regulations Expert today to discuss an end-to-end Crypto AML-CFT software for your business.

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The US government has taken necessary steps in ensuring cryptocurrency regulations. However, it also authorized individual states to introduce their own laws. The US government is positive about blockchain technology and crypto-asset funds. In 2019, the SEC launched a platform where brokers can trade Bitcoin, Etherum, Bitcoin Cash and Ripplecoin.

Despite its support for the use of crypto-asset funds, the US government has concerns over issues of user protection. Below are some of the issues:

• Crypto-asset funds provide users with a very high level of anonymity. This kind of anonymity is what fraudsters and terrorists need to thrive.
• Transactions are also irreversible. This means that users cannot get back funds transferred to a scammer or fraudster.

The National Defense Authorization Act (NDAA)

Despite the issues for concern, the government knows that there has to be some level of compromise from both parties. Late last year, the houses of Congress passed the bipartisan National Defense Authorization Act (NDAA) for Fiscal Year 2021. This act is will help fight against terrorism and ensure fraud prevention. Below are some details of the act that affects the ownership and usage of crypto asset funds as well as other blockchain platforms:

• The Financial Crimes Enforcement Network (FinCEN) is to collect a database of information on cryptocurrency corporations. Corporations that own, operate or transact using cryptocurrencies will have to register with the FinCEN.
• These cryptocurrency regulations and its compliance are not for large firms alone. Smaller companies are now required to disclose beneficial ownership information to FinCEN.
• The act also prohibits individuals from knowingly concealing or making attempt to conceal, falsify or misrepresent a financial institution, the ownership or control of crypto asset funds involved in any monetary transaction of more than $1,000,000.
• The NDAA act also prohibits from falsifying, concealing, misrepresenting or attempting to falsify, misrepresent or conceal information in instances where the owner or the person who controls these crypto asset funds is a senior foreign political figure or any immediate family member or close associate of a senior foreign political figure.
• Whistleblowers can get up to 30% of the money from cases where the penalties are monetary of $1,000,000. However, these whistle blowers must report actionable information about BSA AML/CFT violations.
• Digital and Cryptocurrency providers are to report cases of suspicious activities involving the use of digital and cryptocurrencies.
• The Financial Crimes Enforcement Network (FinCEN) now has the authority to punish firms that do act in line with the current cryptocurrency regulations. Penalties will be in line with the laws overseeing cryptocurrency regulations.

Further Cryptocurrency Regulations

The current NDAA act is seen as merely a start as the legislative arm of government needed to “start from somewhere. There are current talks to amend the current laws regulating the ownership and use of crypto asset funds. This proposed cryptocurrency regulations would see to a strict monitoring of transactions including crypto asset funds.

• Provision of information on transactions above $3,000. This information include but are not limited to: contact information of the customer, type or crypto-asset funds used for transaction, contact information of the recipient of such crypto-asset funds, time of the transaction and other necessary information.
• Banks and other money service businesses will have to report transactions involving more than $10,000 to the FinCEN within 15 days from the date of the transaction.

The FinCEN has announced its intent to amend the BSA’s Foreign Bank and Financial Accounts regulations. In line with this amendment, individuals and entities within the US who have crypto asset funds worth more than $10,000 will now declare it as part of their assets. Reporting assets without including digital asset funds implies violating the FinCEN rule. Considering that the FinCEN now has the authority to punish, it is not in the best interest of companies to go against them.

What Digital Currency Providers Must Do to Stay Complaint

At this point, the laws seem rather endless and excessive. Cryptocurrency regulations focus on ensuring compliance standards are maintained and standards across crypto-asset funds and digital currency providers. Besides the fact that the laws are already too much, most of these laws are against the fundamental principles of blockchain and crypto-asset funds. The idea behind blockchain and cryptocurrency is to empower users with the authority to decide who has access to their information. With the government demanding a database, that purpose may as well be defeated.

There are still many other concerns about cryptocurrency regulations. How does the government regulate platforms whose information the government cannot verify? The report claims that 47% of legislative decision-makers are uncomfortable with the automated authentication procedures of blockchain and cryptocurrencies. A further 21% do not trust the process of automated authentication.

At this point, digital currency providers are in a dilemma. They are currently facing a challenge of whether to act in accordance with the law or stick to the principles of blockchain and cryptocurrency. Here are what digital currency providers must do to stay complaint with the law.

Stay Up to Date with the Latest Development in Cryptocurrency Regulations

To be able to comply with the demands of the government and the law, you have to know what the law states first. The laws guarding cryptocurrency regulations are constantly evolving. The legislative arm of government will still make more laws and it will scrap some of the existing laws. You need to stay abreast with the legal proceedings. This involves knowing how they relate to the ownership and usage of crypto asset funds. There are various ways to stay updated about legal proceedings.

One of such is to subscribe to the newsletter of firms that give information about blockchain and cryptocurrency. Instead of having to keep tabs yourself, you get them to deliver the news to you instead. Another means to get information about cryptocurrency legality is join a blockchain or cryptocurrency community or forum. These forums or communities often feature enthusiasts and professionals in issues regarding cryptocurrency. They are one of the fastest means of getting news about cryptocurrency.

Ensure Stakeholders Stay Informed of Changes to Cryptocurrency Regulations

The saying goes that “what is good for the goose is good for the gander”. Knowing about the current cryptocurrency regulations are as important to your customers as they are to you. You should promptly inform them of the latest cryptocurrency development at all time. Giving your members or users prompt information will enable them to adjust faster and far more easily.

One way to inform users of the recent development on cryptocurrency is by sending them newsletters. Many companies into digital currencies often abuse the use of newsletters. They tend to spam the mailboxes of their users. It makes customers to either avoid reading their mails or report them as spam mails. When sending emails, ensure the mails are concise and straightforward. Furthermore, limit the frequency at which you send them mails.

Use the US Dollar as the Conversion Unit When Providing the Authorities with Information

There are many regulations regarding transactions, particularly the amount of money involved in those transactions. Digital currency providers often offer their services globally to a wide range of audiences. They are not limited to individuals in the US alone. This is why most cryptocurrency providers often use the cryptocurrency with which transactions occur as the value for judging the amount of money sent.

This is quite an issue because the US government works with US dollars. Its cryptocurrency regulations and laws talks about transaction limits using US dollars as the currency for measurements. To this effect, companies that provide cryptocurrency and other digital currencies should always calculate and record the value of such digital currency “at the time of the transaction.”

The quote is very important, as cryptocurrencies are very volatile. Quoting the value of transactions at the time of the transactions is the safest approach to cryptocurrency regulations. Making a mistake or ignoring this warning can be detrimental to providers of crypto asset funds and other digital currencies.

Properly Verify Their Users and Placing Restrictions in Line With the Law

With time, the law will strip cryptocurrency users off the level of anonymity they enjoy. Initially, uploading a scanned document was the major form of identity verification. To ensure fraud prevention and individuals with sinister motives do not use crypto asset funds in aiding terrorism, cryptocurrency providers are now required to properly identify users. As a result, users can no longer use scanned documents as a form of identity verification or photo ID verification.

In replacement, cryptocurrency providers will now demand selfie ID verification as a form of photo ID verification. Instead of posting already scanned pictures, users of crypto-asset funds will now have to take live sefies and upload them to the database. This is because selfie ID verifications are more accurate forms of biometric identity checks.

Identity and residential documents will now be scanned directly into the database. It is easier to falsify information when uploading an already scanned copy, compared to when you are scanning a live copy. With information of the personal and residential information collected by cryptocurrency providers, it will be easier to tender them to the FinCEN on demand.

Report Suspicious Cases in Accordance With the Law

There is a lot of outcry from individuals holding various crypto asset funds. Many of them are already calling the actions of the government an invasion of their privacy. It is also important that cryptocurrency providers do not escalate this issue. It is advisable that cryptocurrency providers work within the tenets of the NDAA when classifying suspicious activities.

Cryptocurrency providers may not be whistleblowers but should still work with the FinCEN. At this point in time, suspicious activities involve transactions of more than $1,000,000. Crypto regulations have previously avoided this powerful tool to assist investigators. Although further reforms may see it go below the stated amount. Cryptocurrency providers should report transactions involving cryptocurrencies worth more than $1,000,000 as at the time of the transaction. Prior transactions that were not worth up to $1,000,000 at the time of their transactions but are currently worth $1,000,000 do not fall into this category.

Cryptocurrency providers have obligations to their users. However, they also have to work with the law when serving their users. This is a necessary step in bringing crypto-asset funds into mainstream transactions and trading. Following the directives mentioned above is a good start. The directives above will ensure that crypto-asset funds and other digital currencies providers comply with the dictates of the law while also protecting their customers.

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About IDMERIT

Headquartered in San Diego, California, IDMERIT provides an ecosystem of identity verification solutions designed to help its customers prevent fraud, meet regulatory compliance and deliver frictionless user experiences. The company is committed to the ongoing development and delivery of offerings that are more cost-effective and comprehensive than other solution providers. IDMERIT was funded by experts who have been sourcing data on personal and business identities across the globe for over a decade. This access to official and trusted data throughout the world has become increasingly important as companies find themselves completing transactions across borders as a standard course of business. www.idmerit.com

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Know Your Customer (KYC), which can also be called Know Your Client, is mandatory for banks, money service providers, and cryptocurrency exchanges. KYC allows for a crypto exchange or money service provider (MSP) to identify risk levels of new customers and protect against fraud, theft, and otherwise suspicious or illicit activity. Both traditional stock exchanges such as the Dow Jones and nontraditional money exchanges such as in the crypto space are required to engage in Ongoing Monitoring of their customers. 

Risk Profiles (which are identified at the onset of a customer’s relationship with the bank or exchange) are monitored and updated at varying points in a customer’s relationship with the institution (one year, three years, or every time a significant transaction is completed). According to Dow Jones, “[c]ustomer profiles will change over time and firms must conduct ongoing monitoring of their business relationships to ensure risk profiles haven’t changed in a way that would expose the firm to non-compliance and reputational damage.” Know Your Customer (KYC) is standard practice for any compliance program and necessary to ensure clients are who they say they are.  

What is Blockchain?

Blockchain is a distributed ledger framework that cryptographically stores data on an open or private network. Blockchain is a technology that aims to transform the backend systems that most businesses run on. It aims to become a lower cost, more efficient way to share information and data between open and private networks.

Blockchain is useful as a tool in new Anti-money laundering solutions for fraud and risk departments across financial institutions. This is because the data that is stored on the framework is immutable. Within a blockchain system, data entries cannot be edited or modified.. Instead, they can only be appended after entering the system. This is particularly useful in AML transaction monitoring because it prevents criminals from trying to mask their transactions to prevent detection. The transactions will always be on the blockchain, no matter what a criminal does to attempt to modify them.

This will help banks save money in the long run. For example, Deutsche bank recently was fined over $700 million in 2017 because of accusations that it helped launder money out of Russia. Earlier this month, USB was fined over $5 billion by French regulators for money laundering and tax evasion. With blockchain technology in place, it would be more difficult for associates to evade the AML process and cause damage to a financial institution’s overall reputation.

An Anti-money laundering solution built on the blockchain could leverage the inherent qualities of the blockchain in order to identify and prevent illicit transactions. If the software used to monitor transactions is an AI with machine learning functionality, it could effectively run through strings of data to determine if money laundering activity is occurring. The reason this would work is because AI will be able to detect patterns in large volumes of data while adapting to changes in criminal activity over time with its machine learning capabilities.

Blockchain for AML Compliance

These tools would automate the transaction monitoring process and make it much more efficient and effective than current processes are today. Plus, if suspicious activity is detected, it could be highlighted, flagged and stopped for further investigation. All this activity would be immutably stored on the blockchain as well.

$1.4bn Stolen by Cyber Criminals as the Cryptocurrency Industry Faces New Round of Compliance/AML Failures

Major cryptocurrency exchanges are on the alert as 2020 brought another round of hacks, thefts, and decimating losses. Despite more stringent regulations being adopted across the European Union (EU), billions of dollars are being lost due to banks and exchanges failing to implement these new compliance hurdles.

EU Enforces Compliance as Fifth Anti-money laundering Directive Shakes Industry

As the EU’s Fifth Anti-money Laundering directive came into force on January 10, 2020, organizations operating in the crypto space are being challenged to update their compliance programs. Most notably, Bitcoin.com notes that the EU law will, “oblige digital asset exchanges as well as providers of crypto payment and custodian services to apply for licenses from the Federal Financial Supervisory Authority (Bafin).”   

The Fifth Directive states, “Recent terrorist attacks have brought to light emerging new trends, in particular regarding the way terrorist groups finance and conduct their operations. Certain modern technology services are becoming increasingly popular as alternative financial systems, whereas they remain outside the scope of Union law or benefit from exemptions from legal requirements, which might no longer be justified.” 

Major Risks For Non-Compliant Organizations Operating in the Crypto Space 

Risks Surrounding Client Anonymity: The Fifth Anti-money Laundering Directive’s 9th section points out that, “anonymity of virtual currencies allows their potential misuse for criminal purposes. The inclusion of providers engaged in exchange services between virtual currencies and fiat currencies and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions, as a large part of the virtual currency environment will remain anonymous because users can also transact without such providers.” It goes on to note that in order to combat this loophole, “national Financial Intelligence Units (FIUs) should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency.” In the United States, financial institutions are required to identify and report suspicious activity reports (SAPs|. 

The Fifth Directive also discusses the idea of self-declaration and that FIUs, “should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency.” Despite growing regulations, there still exist major challenges which have led to billions in scams, ponzi schemes, digital currency theft and extortion. 

PlusToken, WuToken, & KuCoin Just To Name a Few Highlight Need For KYC in Crypto Space

Boxmining, a leading technology and fintech asset media property and FinTech trends outlet states, “Plus Token” was a cryptocurrency Ponzi scheme disguised as a high-yield investment program. Platform administrators closed down the operation in June of 2019. Fraudsters abandoned the scheme by withdrawing over $3 Billion dollars in Cryptocurrencies (Bitcoin, Ethereum, and EOS) and leaving the message “sorry we have run“. This has led to an international manhunt for the platform administrators and creators of Plus Token. Plus token has been blamed for causing Bitcoin prices to fall in 2019 as stolen funds were sold via Bitcoin OTCs.” The need for proper KYC and transaction monitoring is especially apparent in the case of PlusToken. 

WuToken Hack: $281M Gone In An Instant

Cryptocurrency exchange KuCoin was instantly decimated with losses of over $281M in 2020. COO Insights reports that, “[o]n September 26, cryptocurrency exchange KuCoin issued a statement that it experienced a ‘security incident’. At that point, some USD 150 million in BTC (bitcoin), ERC-20 (ethereum-based tokens), and other cryptocurrencies were estimated to be stolen. 

Over the next couple of days, that amount had grown to USD 280 million, effectively making the KuCoin hack the third-largest crypto hack. Only Coincheck, which suffered a USD 534.8 million hack in 2018, and Mt. Gox, which lost USD 460 million in 2014 to another hack, were ahead in terms of loss.” 

Hacks and Ponzi schemes like these are rampant but organizations that build strong compliance programs, including AML risk profiling and KYC and Extended Due Diligence (EDD) processes will face a much less risky foray into the crypto space. 

About IDMERIT

Headquartered in San Diego, California, IDMERIT provides an ecosystem of identity verification solutions designed to help its customers prevent fraud, meet regulatory compliance and deliver frictionless user experiences. The company is committed to the on-going development and delivery of offerings that are more cost-effective and comprehensive than other solution providers. IDMERIT was funded by experts who have been sourcing data on personal and business identities across the globe for over a decade. This access to official and trusted data throughout the world has become increasingly important as companies find themselves completing transactions across borders as a standard course of business. www.idmerit.com

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