Cryptocurrency – According to estimates made by the United Nations, approximately USD 800 billion to USD 2 trillion are laundered each year, which represents 2-5% of the global GDP. On top of this, around 90% of the money laundered goes undetected. Other similar statistics that emphasize the intensity of this problem are listed below;
- USD 2.8 billion was laundered through crypto exchanges in 2019
- Bitcoins worth USD 829 million were spent on the dark web in 2019
- Hacks, frauds, and crypto thefts reached an amount of USD 1.36 billion within the first five months of 2020
- 56% of worldwide crypto exchanges have insufficient and weak KYC identification protocols. Countries mentioned in the worst offenders list include the USA, Europe, and the UK
Considering these statistics, it is evident that money laundering has become a widespread problem. Although cryptocurrencies enable faster and cheaper international transactions, they also facilitate criminals in carrying out fraudulent activities, such as identity theft, money laundering, and terrorist funding.
To stay one step ahead of such crimes, regulatory authorities have introduced robust anti-money laundering (AML) and Know Your Customer (KYC) regulations. Through such regulations, the amount of money laundered through cryptocurrency exchanges can be substantially reduced.
Robust AML compliance programs consist of effective KYC processes to accurately identify and verify the identity of individuals. This way, businesses can root out suspicious transactions taking place in the stock HeatMap. But before we go any further, let’s understand what is meant by the KYC process and how it is applied in the world of cryptocurrency.
Know Your Customer and Cryptocurrency
KYC, or Know Your Customer, refers to the mandatory process of customer identification and verification and fits in the initial CDD (Customer Due Diligence) stage in the anti-money laundering processes. By verifying identities during the customer onboarding stage, financial institutions can allocate a risk value which further assists in reducing rates of financial fraud.
Today, cryptocurrency exchanges and wallets have also gained their position as financial institutions, making them liable to conduct KYC checks and devise effective AML programs. The KYC process for cryptocurrency exchanges involves collecting the individual’s PII (Personally Identifiable Information), such as their full name, date of birth, residential address, etc. this information is then verified against their official ID documents, such as a government-issued ID card, passport, utility bill, driver’s license, bank statement, etc.
Once the customer has been accurately identified, they are verified against global databases, which filter out fraudsters from PEP lists (Politically Exposed Persons), watchlists, and global sanctions. This allows financial institutions to gain a better understanding of potential risks associated with each customer. Apart from this, the advantages of KYC for cryptocurrency are discussed below:
1. KYC Builds Transparency and Trust
Virtual currencies and their exchanges are usually at the receiving end of financial frauds and scandals, that discourage new customers from trusting in cryptocurrency. For crypto exchanges to work, individuals deal with trading coins, and to trade coins, customers must trust the exchange to keep their money safe. When customers are aware that crypto exchanges are implementing necessary KYC measures, they are aware that fraudsters are being kept away which ultimately helps build trust. This is particularly important for peer-to-peer exchanges, in which users directly trade with each other on their own terms.
2. Lower Risk of Financial Crime
Once cybercriminals are registered with exchanges and deal with crypto transactions, it paves the way for hacks, phishing attempts, and numerous other financial frauds. Online identity verification reduces the probability of financial fraud as customers are accurately identified and verified during the onboarding process. This weeds out fraudsters and high-risk customers, thus lowering the likelihood of fraudulent activities occurring via the cryptocurrency exchange or wallet.
3. Necessary for Stabilizing the Crypto Market
AML and KYC compliance is necessary for the stabilization of the cryptocurrency industry. As the major barrier to the mass adoption of cryptocurrency transactions revolve around a lack of trust in this sector, robust KYC measures can substantially elevate the image of crypto exchanges and encourage customers to regard them as legitimate entities.
For the world to truly trust in the cryptocurrency world, crypto exchanges must adopt effective KYC processes and AML programs. This way, customers would be aware that the system is closely monitoring and assessing risks in an attempt to protect their transactions, which in turn helps to stabilize the industry through increased adoption and a higher level of trust.