Protect Your Bitcoin Business With KYC Compliance

  • Richard Marley
  • December 01, 2017
  • 11 minutes read
  • 2504

Even with a lot of resistance to its use as a form of currency, Bitcoin and its blockchain technology have come a long way. It started the whole concept of cryptocurrencies and not only that its initial development and consequently increasing value and demand has spawned many new businesses. As with all businesses where some sort of money or monetary value is involved, there will always be the threat of money laundering, scams and threat of fraud either by the company itself or the end consumer. In this case, KYC compliance is essential not only to conform to rules and regulations set by the government or other regulatory bodies, but also to safeguard one’s own business and financial interests. We will elaborate more on what the businesses are and how they can benefit from knowing their customer and identity verification both in the short term and in the long run. At the end of this article we will discuss KYC solutions and what a business should look for when searching them.

Bitcoin and Blockchain Related Businesses

As mentioned previously, Bitcoin and the blockchain technology has given rise to many businesses that are centred around them. We’ll be taking a look at what they are and then in the next part  discuss how they can protect themselves through KYC compliance and identity verification.

Bitcoin and Cryptocurrency Consultant With the ever rising popularity of Bitcoin and Cryptocurrencies, more and more people turn to them as forms of investment and/or to use as currency. These people are constantly looking for experts in the field of Bitcoins and cryptocurrency for advice and consultancy on how they can get a piece of the crypto pie. This is a well paying and much sought after position. With the main requirement that consultants should be able guide people in all aspects including risk management  and minimisation.

Cryptocurrency Wallet – The concept of the Bitcoin or crypto wallet has been around since the first time that Bitcoin and Blockchain came into being. It provides a secure place to store the digital currency. As more people turn towards the making of these digital wallets we can see more innovation in the terms of the handling and security that these digital coin storage s/w provide.  

Bitcoin Trading and Cryptocurrency Exchange – This platform came into being following the stock exchange model. As people turned towards the cryptocurrency they looked for venues where they could trade cash and other cryptocurrency for Bitcoins and other digital coins and vice versa.

Cloud Based Bitcoin and Cryptocurrency Mining Bitcoin and cryptocurrency transactions require independent verification that can only be done through specialised software. As a reward for these verifications/hash checks people are awarded a certain amount of the cryptocurrency. This process is known as mining. Mining cryptocurrency such as Bitcoin and Ethereum requires expensive hardware, cloud based mining services provided a platform for investors with little capital to get in on the mining of these cryptos and get some in return. On top of dividing the hardware cost among small investors these mining operators charge a small service fee.

ICO (Initial Coin Offering) using the Blockchain Technology – This is the biggest business that has come about as consequence of Bitcoin and the blockchain technology. Similar to IPOs many companies and organisations are turning to blockchain technology and offering ICOs (coins) in return for funding by potential investors. Investors fund the said companies in return for these coins  which depending on the performance of the company are expected to increase in monetary value. Some companies even offer benefits and dividends in the form of discounts and alternate coins. Due to 

Bitcoin ATM – Bitcoin ATMs have become increasingly popular they allow people to purchase or sell their Bitcoins from the convenience of an automated machine similar to the ATMs that allow the withdrawal and deposit of cash.  

KYC Compliance and Identity Verification

The KYC compliance or Know Your Customer process and identity verification are not new concepts. In fact before the advent of online account opening, when you walked into a bank to open an account they would make you sit down and gather all your personal details. This is the Know Your Customer part. Before the account was opened, they would ask for some identification such as your social security number or an id card this part is the identity verification part. They needed to make sure that you really are who you say you are. This is not only to safeguard their own interests but also to make sure that other individuals are protected from any sort of fraud or identity theft. On a personal level, it helps organisations know their clients and customers better. Also, adding a personal touch to a business transaction is always appreciated and is a major part of developing rapport.

The government and other regulatory bodies that watch over financial companies, exchanges and businesses such as banks have a requirement for these organisations to maintain KYC and identity authentication. They do this to prevent money laundering, identity theft and to safeguard the money of the public from fraud. If businesses do not comply they are heavily fined and in worst case scenarios shut down.

Now more than ever, consumers are turning to the Internet for the majority of their financial, business and purchasing needs. Hence, these days the entire process of KYC has been made digital and can be done online. Also the same goes for identity verification it can be done online as well. In fact there are tech firms specialising in KYC solutions. Banks, online traders and companies are turning towards these specialised businesses for their KYC and identity validation needs. We will elaborate this in greater detail soon.

Ways KYC Compliance can Secure the Business

Having explained what KYC and identity authentication is by the use of an elaborate example, let us see how they can help the Bitcoin and crypto businesses.

Governments agencies and other financial regulatory bodies are working towards imposing strict regulations and rules on Bitcoin and other cryptocurrencies. So the first point is if you are already compliant with existing KYC and authentication regulations then you have secured your business from heavy fines and even closing down.

Bitcoin and crypto exchanges, cloud crypto mining companies, Bitcoin ATMs and organisations offering ICOs all need to go through KYC and identity authentication. The simple reason is that they deal in credit cards or debit cards or fiat cash. Where these forms of payment are used the chances for fraud and the use of laundered money increases. Also, there is the chance of a chargeback with the use of stolen cards. A chargeback can also be associated with a legit person who saw there is no ID verification involved and hence, decided to report that they haven’t done the transaction and get the Bitcoins as well as the cash back.

Bitcoin wallets although do not deal in credit cards and cash in general, but they are liable to be investigated in money laundering investigations . It is imperative for them to ensure that they are compliant with KYC and authentication regulations to avoid bad repute and heavy fines. For crypto consultants it is necessary that they are aware of all regulations and understand the best practises involved in Bitcoin businesses, hence, it is essential for them to know about the various KYC compliance requirements and identity authentication rules and regulations.

What to Look For in a Digital Know Your Customer Service Provider

We have mentioned the reason for why Know Your Customer and identity validation procedures are essential for the protection of Bitcoin and crypto associated businesses. Now, we’ll discuss the points that such businesses should look for when searching out KYC solution providers.

Ease of Use –  This should be the first thing that companies should look for. A solution that can be easily integrated with the existing system is invaluable. Also, ease of use should be taken in context with your customer or client. It should be easily understood by your customer to avoid loss of business.

Speed – People in general do not like long time consuming processes and procedures and if they find that something is going to take a lot of time they will usually leave it. The entire Know Your Customer and ID verification process should be quick. Good companies offer verification times in the seconds.

Features – Since you will be paying for these services, the more you get for your money the better it is. Make sure that they offer both online and offline data collection and user verification services. Online or real-time verification allows clients to ask their customers to show their faces and identification right then and there. The entire process is recorded either by taking pictures or a video. Offline can give you the option to verify by having the customer submit in their documents for verification.

Technology – Most third party verifiers will say that they have an advanced AI that checks for any tampering with identification documents or any other suspected tampering such as wearing of masks during real-time checking. Better companies such as Shufti Pro will offer a hybrid system that includes AI along with human validation to give it that extra check.

Compliance – Another very important requirement is that the authentication service provider should be compliant with all rules and regulations associated with the industry. For example take GDPR that is being implemented in the EU. Non compliance or lack of it can result in heavy fines for the business as well as the service provider. So besides ensuring that you have secured  KYC compliance you need to make sure that your identity validator is aware and compliant with the latest regulatory developments in the industry.

With the surge in KYC.AML regulations around the world by authorities; it only makes sense to have a strong preemptive safeguard measure in place.

Challenges of KYC Compliance for Cryptoverse

KYC compliance or introduction of a KYC software on any crypto-based platform cannot go without hankering on both sides of the aisle. Regulators will have a strong desire to not allow “digital bandits” into the confines of a conventional financial system. On the other hand, a large number of crypto-enthusiasts will find a KYC service, totally against the very spirit of crypto verse. But the truth of the matter is that cryptocurrency is here to stay and so are financial regulations and more importantly KYC compliances. Cryptocurrency is the main tool to run the blockchain based economy and KYC regulations are a method to secure the interest of a common consumer.

KYC services for a cryptocurrency add an additional layer of security, which is a perfect match to the intrinsic anonymity of blockchain based cryptocurrencies. Digital KYC opens new avenues of collaboration between crypto-enthusiasts and those launching exciting new products using the infinite benefits of blockchain technology. So, the major challenges in the large-scale adoption of KYC solutions in crypto verse can be summarily described as:

The stigma attached to cryptocurrency:

Unfortunately, cryptocurrency in general and Bitcoin, in particular, have earned a bad reputation because of its earlier users being involved in several illegal activities. There is no doubt that the de-centralized nature of bitcoin attracted a large swath of people who wanted to use the virtual currency as a medium of transaction for their criminal activities. But now, even bitcoin and the majority of cryptocurrencies are being used for large-scale adoption of blockchain technology and to raise capital through ICOs.

Doubts originating from Volatility:

 Just recently, all major cryptocurrencies witnessed an unprecedented slump in prices.  Much like its huge price hike, there is no general consensus on the reasons for this volatile shift in prices. This also creates problems for businesses who want to integrate ID verification with their crypto wallets or want to use KYC and AML for their upcoming ICO.

Misunderstandings regarding KYC

This surely is the greatest challenge in the popular adoption of know your customer technology within the crypto verse. Most of the crypto-devouts believe that cryptocurrency is the easiest way of laying low and flying below the radar of financial regulators. They find it cheaper to perform transactions using cryptocurrencies. De-centralized nature of cryptocurrency and a pirate like a lifestyle is the idealization of the majority of people that oppose KYC for cryptocurrencies. Until and unless, this crowd of people is swayed to the fact that KYC services will help secure their vested interest from online scammers and digital fraudsters, it is virtually impossible to achieve large-scale adoption of KYC for cryptocurrencies.

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