Cryptocurrency: The Next Big KYC Market

The latest industry news, interviews, technologies, and resources.
Oct 19, 2020
5 min read

A new study by crypto intelligence firm CipherTrace has shown that at least half of virtual asset service providers (VASPs) have weak or porous KYC. 

The data from the survey come to solidify an idea that has been floating around for quite some time - crypto exchange is the next big KYC market. 

Only a couple of months ago, the Commodity Futures Trading Commission (CFTC) also brought civil charges against the founders and five other entities behind BitMEX for failing to register with the agency and for not implementing AML procedures.

In an interview with “Unchained Podcast” on Oct. 13, United States Securities and Exchange Commissioner Hester Peirce told host Laura Shin that the recent charges have put the international crypto industry on notice about AML and KYC regulations.

I think that the message has been coming to the industry fairly loud and clear on the AML/KYC front, and I’m sure it will continue,” said Pierce. “It’s definitely sending a message to the crypto world that when there are U.S. users of a product or a service, there’s going to be enforcement of U.S. laws.”

Many crypto-to-crypto exchanges, even those with high trading volume, like Huobi and HitBTC, do not have KYC processes in place and this is something that is about to change.

Why The Crypto Market Is A Money Laundering Haven

Crypto is still relatively new territory for users and regulators alike. 

The unclear nature of crypto has allowed it to evade the eyes of the law for quite some time. Is it money, is it an asset, a product, a property? Both the technology and user applications of this new sector have a lot of grey areas that are now coming into the light. 

The unclear status and makeup of the technology make the crypto market a money-laundering haven

Want some proof? Look no further than CipherTrace’s third-quarter report for 2019, recording crtypto losses in the range of $4.4 billion.

It’s no surprise that it didn’t take long for governments to jump on this giant, gaping loophole and address the issue at hand. 2019 was the year of responding to crypto but it seems like there’s a lot more to come. 

The Cryptocurrency/AML Paradox

When you sit down and converse with a cryptocurrency purist, it won’t take long to fall in love with the idea behind the crypto -  a decentralized finance technology that was created to free currency from central authorities and give total power and authority to the people.

In a nutshell, cryptocurrency promises anonymized, secure transactions. That sentence might bring a smile to your face, but you know who is reading that sentence with even greater joy? Criminals around the world.

Crypto technology makes it easy to hide identities and illegal activity, creating a platform that can be exploited by the black market, criminals, terrorists, convicted felons and anyone with malicious intent. 

Let’s talk numbers just so you get an idea of how big that smile is. A recent report from Australian University academics showed that approximately 25% of all bitcoin users and 44% of bitcoin transactions in 2018 were associated with illegal activity. 

After digesting those staggering numbers it’s easy to see why crypto is considered amongst the most unregulated markets in the world, why it needs some sort of regulation and where the paradox is created. 

The same technology that was created to liberate people from the oversight of traditional financial institutions is the one that needs the most oversight. That’s quite something, isn’t it? 

The Escalation Of Crypto Regulation

First, you had the guidance paper regarding virtual assets, and virtual asset service providers from the Financial Action Task Force (FATF).

Then you had the joint statement from the U.S. Commodity Futures Trading Commission, the Financial Crimes Enforcement Network, and the U.S. Securities and Exchange Commission, reminding persons engaged in activities involving digital assets to establish and implement an effective anti-money laundering program, adhering to recordkeeping and reporting requirements. 

As you would expect, Europe joined in with its paperRegulation Of The European Parliament And Of The Council on Markets in Crypto-assets (MiCA).

Things have been escalating in recent months with countries addressing the crypto issue like dominoes. First, we have the French commerce court ruling Bitcoin as currency, determining its legal status once and for all. 

Then, we have the announcement from German financial watchdog BaFin that Bitcoin and other cryptocurrencies are now officially classified as legal financial instruments in Germany. BaFin’s new guidelines define crypto assets as:

A digital representation of value which has neither been issued nor guaranteed by a central bank or public body; it does not have the legal status of currency or money but, on the basis of an agreement or actual practice, is accepted by natural or legal persons as a means of exchange or payment or serves investment purposes; it can be transferred, stored and traded by electronic means.”

In Australia, a court agreed that a crypto exchange account can be used as security for potential legal expenses. 

You can see where this is trending, right? The atmosphere around cryptos has escalated from guidance reports, to court rulings. 

With all of the above in mind, let’s shift our attention to the huge commercial opportunity that arises for FinTech companies around the globe.

Cryptocurrency: The Big KYC Opportunity

KYC technology has been growing rapidly over the past decade and has expanded its reach to industries well beyond financial services. 

While there is still a big opportunity for regtech and more specifically KYC technology to take over in all those verticals, the most obvious opportunity is cryptocurrency.

This is untouched territory, an industry that brings its own set of challenges and presents a riddle that nobody has found the answer to. Here at Identomat, we love challenges and the crypto market is something we have been studying for a long time now. 

Our technology is built to solve problems and our team is ready to answer any questions you have regarding the KYC-crypto match. Reach out and let’s discuss.

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