Melissa UK Team | Fraud Prevention, United Kingdom

Cryptocurrency has proven to be a popular choice amongst adventurous investors, with its anonymous nature, confidentiality, and lack of regulation, we can see the reason for its global trend.

With each digital currency having its speculative nature the only way for them to become truly become mainstream is the adaption of ID and KYC processes.

Why do we say this? well in 2020, $2.8 billion was recorded in laundered money through cryptocurrency exchanges, as we are aware of the ever-increasing threat of cyber-crime and fraudulent acts already. cryptocurrency is now one of the top go-to havens for such activities.

One of the reasons for these digital identity requirements are quite new to the crypto world when we compare this to their traditional financial institutions and counterparts spending upwards of $100 million in compliance and manpower, all to make the onboarding process on both ends worthwhile for both customer and business.

Another reason is regulations on cryptocurrencies are often lagging in such markets where they operate, the global nature of its virtual venture makes it hard to regulate because of its decentralised form of finance, being anonymous and a confidential form of currency.

When it comes to investment platforms and exchanges holding digital currency to transact in, most KYC checks are performed after the onboarding process, which in this case still requires an ID document and photograph which they can start trading immediately but may only be stopped if the KYC check suspects something suspicious, or more commonly, just being hit with account limitations like disallowing withdrawals.

90 million people around the world have already brought cryptocurrency, whether it’s to hold or for other forms of transaction, these numbers will only increase as almost every brokerage platform now has at the very least a handful available for any investor to delve into as they open themselves to the consumer demand and new digital currencies released regularly.

Lucky for the world of compliance, the EU has started to bring in regulations towards cryptocurrency asset exchanges and digital wallet providers which looks to amend inconsistencies in KYC. The Fifth Anti Money Laundering Direction (5AMLD) will see activities around cryptocurrencies as “obliged entities” and will have similar measures applied to current financial institutions, this includes customer due diligence and enhanced due diligence obligations to combat money laundering, financing of terrorism (CFT), tax evasion and other financial crime.

You can find out more about what is customer due diligence here.

Such verification will be required to meet these obligations including:

• Proper know your customer (KYC) onboarding which includes checks from customers onboarding and also during certain phases in transactions or periods.
• In-depth checks on company ownership or KYB checks.
• Enhanced AML screening like screening against sanctions, politically exposed persons (PEP) and other governmental and international watchlists.
• Name-to-address checks & address verification

While the above listed will significantly improve the risk of financial crime around cryptocurrency, do not expect this to happen at a drop of a hat, it will take some time before these asset-related businesses will know what is expected of them, get proper procedures in place, and ensuring consistency across all checks to be considered more important than rushing to a deadline.

While big FI’s can potentially implement something within six months or sooner it is small to medium-sized companies with fewer resources that may take anywhere from a year to three years which will hold up that widespread compliance.

As this virtual market grows with mainstream traction such as cryptocurrency exchanges, wallets and assets will need continuous innovative ideas to survive, not just simple adaption to compliance measures, we must always remember that financial crime advocates will also adapt to such compliance measures and find ways to loop around. It will be interesting to see how free-market cryptocurrency institutions and exchanges amend themselves to these challenges to see themselves fit for purpose. Melissa specialises in offering Identity verification, KYC and AML solutions mentioned above and can tailor to any business big or small in the fight to combat financial crime and future proof toward any potential regulatory oversight going forward.