The Importance of Simplified KYC and Risk for Onboarding and Fraud Defence.
Published on May 20th, 2021.
How Challenging is the Area of KYC and Risk Mitigation for Crypto Companies Right Now?
Money Laundering via Cryptocurrency.
Over the last few months, there has been increased adoption of cryptocurrencies. They are finally surfacing as a palatable alternative payment method to fiat, with more than 5000 different tokens now being traded in various parts of the globe. One survey unveiled that 45 per cent of respondents preferred Bitcoin rather than stocks, real estate, and gold, and trust in Bitcoin has grown 29% in the past three years. In December 2020, Bitcoin price rose upward by $24,000; this is a 224% increase in Jan 2020. The price was further propelled upward in January 2021, smashing its previous price and surpassing a record of $40,000. According to Coindesk, on May 19, 2021, Bitcoin was worth $38,414.43 USD, while Ethereum was worth $2,564.60 USD, and the crypto market is expected to hit $1.7 billion by 2027.
The roles of institutional players and the adoption of crypto as a payment option by large gambling firms attribute primarily to the rapid growth and adoption of these cryptocurrencies. Besides, Elon Musk's tweet and Tesla's investment of $1.5 billion also contributed rapidly to its high rise.
In addition, the lack of regulation, dramatic fluctuation in price, and its propensity for confidentiality also drew the interest of investors. However, these factors have also made crypto trading appealing to money launderers who now take advantage of the anonymity provided by this currency in laundering money across the world.
Global regulations and fraud prevention requirements expect to enhance as digital currencies continue to infiltrate deeper into our advancing digital market. The rapid rise of adoption will inevitably bring more risk and open gates for sophisticated fraudsters to indulge. Historically, regulations over digital currencies have been inconsistent patchwork solutions founded on reaction and implemented state by state and country by country. For an industry built and designed for instant, global, internet-based transfer, this has been challenging to navigate. In Europe, where most nations are now transposing the first money laundering directive (5MLD), licensing and registration requirements are being implemented.
Figures from the United Nations show that each year, over $800 billion to $2 trillion are being laundered across the globe; this represents 2-5% of the global gross domestic product. The exact volume of crypto laundering is yet to be ascertained. Out of this enormous figure, about 90% of this transaction goes undetected.
In 2020, figures show that crypto theft, hacks, and fraud totalled over US$1.36 billion in the first five months. A different analysis covering over 800 market exchanges found that 56% of all crypto exchanges worldwide have weak KYC identification protocols, while exchanges in the U.S., Europe, and the U.K. have been among the worst offenders. Most of these laundered funds channel towards nefarious activities like human, drug trafficking, terrorist financing, and tax evasion.
Due to this, governments are cracking down on these exchanges to curb crime. They have also set up several regulations, such as the Regulation on Markets in Crypto Assets (MiCA) and the U.S. cryptocurrency regulation, to promote innovation, providing customers and investors with the right level of protection and ensuring a financially stable market. Some of these exchanges are advancing their security measures, such as being KYC compliant to end this crime and mitigate against risk.
The Importance of KYC?
KYC isn't new to the crypto world. Various exchanges deploy their use differently. After onboarding, most of the KYC in the crypto world processes, allowing crypto users to start trading after signing up on a platform and only stopped if a KYC check alerts suspicion. Although the use of KYC offers so many advantages in curbing money laundering and terrorism, manual KYC has so many disadvantages that result in complications in the crypto market. Some of these challenges include:
Digital currency platforms will need to not only implement more advanced Know Your Customer (KYC) into their customer onboarding and engagement journeys but be ready for whatever regulatory advancements generate, globally and per localised region. However, doing so efficiently and seamlessly has proven to be one of the most significant industry pain points. Integrating a single KYC data service provider can be a costly and cumbersome process. Many crypto platforms have integrated the bare minimum. They have not established a foundation to future-proof their KYC and risk mitigation while harnessing the power endless on-demand KYC can do for their business.
- The traditional KYC is quite expensive: With standard KYC, exchanges must register with regulatory bodies and pay for verification. The procedures are costly as it involves sending customer documents to third parties for verification.
- Time-consuming: Manual KYC is time-consuming, and the verification process sometimes takes up to 30 days.
- Security concerns: Manual KYC involves the collection of sensitive customer data. This data is vulnerable to hackers due to the lack of strong security procedures.
- Furthermore, current KYC practices can't scale increased regulations, with so many nations now looking at building their own central bank digital currencies.
Many platforms streamline KYC for exchanges to end the challenges listed above. Instead of the expensive and tedious process involved in manual KYC or managing multiple third-party data providers, these next-generation identity verification platforms automate KYC verification and make room for faster and more effective customer onboarding.
Data aggregation and orchestration hubs with build-in anti-fraud technology prove the way to solve the cost, time and complexity many businesses face in their risk mitigation. They provide instant access to thousands of KYC data services with real-time activation, agility, automation and a consolidated view of risk to bolster onboarding and transactional security measures from a single endpoint. They are becoming the most efficient method to obtain all the KYC required and premium fraud defence without any touch on operations and time lost on multiple KYC integrations without sacrificing user experience and verification accuracy.
4Stop, leaders in data aggregation and fraud prevention technology, have the world's first data and risk marketplace composed of tier-one global data providers within their ecosystem - providing complete global coverage. 4Stop brings simplicity to manage fraud defence and an array of data for identity, transaction and compliance verifications regardless of region, market or industry worldwide. Through 4Stop’s solutions, crypto businesses onboard customers while managing risk 7x faster than any other solution.
4Stop aggregates over 150 data services with 2000+ data sources and advanced proprietary technology to establish a modern end-to-end Know Your Business (KYB), Know Your Customer (KYC) compliance and anti-fraud marketplace. Businesses can select what they need, where they need it and apply it instantly into their operations through various implementation methods - a white-labelled experience, the 4Stop cloud platform or the API. Eliminating the need to manage multiple third-party data providers with associated contracts and fees, drain on development resources, time to market or cumbersome processes staying current with regulatory and fraud prevention requirements. 4Stop gives flexibility, agility and future-proofed sustainability from a single integration.
The benefits and impact of implementing advanced KYC results on building trust, mitigating risk, managing compliance and developing safe and secure online services are substantial.
Discover 4Stop’s services watch ‘Know Your Risk. Always.’ webinar or check out solutions below.