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Latest Regulatory Updates on KYC Verification for Crypto Exchanges

Richard Marley
June 28, 2021
7 minutes read
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Even by the standards of cryptocurrency, the volatility exhibited in 2021 has been astounding. In late May 2021, a crypto crash wiped off USD 1 trillion in market value. This impacted major cryptocurrencies such as Bitcoin, which experienced a substantial 30% loss in value.

Noted names like Elon Musk have stirred a global interest in crypto, particularly as PayPal announced the acceptance of payment in Bitcoins. With money shifting from traditional financial markets to cryptocurrency platforms, global regulatory bodies are stepping up to draw rein on the crypto markets.

What is KYC for Crypto?

KYC, abbreviated for Know Your Customer, is a process that requires customers to submit their identity information for the purpose of verification. Cryptocurrency exchanges can use the KYC data to monitor customers and their transactions, ensuring the mitigation of financial crimes through cryptocurrencies. KYC verification has been mandated for cryptocurrencies under the FATF’s Travel Rule.

The Unsatisfactory Track Record of Crypto KYC Compliance

Blockchain analysis firm CypherTrace stated that by the end of 2020, approximately 56% of all cryptocurrency exchanges were not complying with global KYC regulations.

What makes KYC verification necessary for crypto is that such processes have the ability to put a halt to ever-increasing crime rates. In 2020 alone, an estimated USD 1.9 billion worth of crypto was used to facilitate identity theft, hacks, and other financial frauds. The UK is playing an active role in controlling the burgeoning crypto market, while China has completely banned the trading of cryptocurrencies in the country. Other countries that are in the process of devising robust KYC reforms for crypto include the US, Russia, and Singapore.

Europe – KYC Verification and AMLD6

Financial institutions in the EU have to comply with Anti-Money Laundering Directives (AMLD). Recent additions – the AMLD5 and AMLD6 – have introduced updates regarding KYC verification requirements for crypto exchanges.

These directives include the list of processes that financial institutions, including cryptocurrency exchanges, need to follow to curb money laundering and related financial crimes. The latest update expanded the scope of AML verification to virtual currency wallets. This means that any crypto exchange that enables fiat-to-crypto transaction needs to comply with appropriate KYC and AML standards, as directed by EU’s latest regulation on Markets in Crypto Assets (MiCA).

The consequences of non-compliance have also been enhanced. Individuals and corporations that fail to comply with KYC verification requirements can receive a range of punishments – from simple “cease and desist” orders to imprisonment up to four years.

North America – FINTRAC and FinCEN

In Canada, the scope of KYC verification has finally been extended to include cryptocurrency exchanges in its updated KYC regulation for 2021. The regulatory body of the country, FINTRAC (Financial Transactions and Reporting Analysis Center), has obligated crypto exchanges to perform KYC verification on their users and meet KYC compliance requirements in the same way as traditional financial institutions. The submission of a Virtual Currency Transaction Report (VCTR) has also been mandated when receiving an amount in virtual currency equivalent to USD 10,000 or more.

In the south, the US Treasury Department proposed stringent KYC regulations for the crypto industry last December, asking crypto exchanges to verify the identity of the owners of crypto wallets if the transaction exceeds USD 3000. On top of this, the authority also made it compulsory for digital exchanges to submit personal information of crypto wallet owners to FinCEN (Financial Crimes Enforcement Network). This includes their name, address, and the purpose of the transaction.

However, the controversial proposal has now been put on freeze by President Biden’s administration, much to the relief of the crypto industry.

Asia – Varying Approaches in China, Singapore, and Thailand

One of the biggest digital economies in the world, China, holds a strict stance towards cryptocurrencies, particularly as crypto transactions fuel online financial crimes. In 2017, cryptocurrencies and ICO’s were completely barred from operating in the country, forcing numerous Chinese crypto exchanges to move abroad.

China bans financial, payment institutions from cryptocurrency business https://t.co/G8KNNMCkpH pic.twitter.com/D2fcMkJYtj

— Reuters (@Reuters) May 18, 2021

Other Asian Economies such as South Korea are not bent towards banning crypto exchanges and are instead pushing ahead with stringent KYC verification and AML regulations. Thailand has already implemented in-person client KYC verification on new cryptocurrency users. Their Know Your Client verification system relies on authenticating chip-based ID cards, making it impossible for foreigners to invest in local exchanges.

Singapore, dubbed as the Crypto Haven, has taken a friendlier position when it comes to cryptocurrencies. KYC verification and AML screening of end-users have been mandated, along with the submission of SARs (Suspicious Activity Report) to the Monetary Authority of Singapore (MAS).

Why are Crypto Exchanges Hesitant towards KYC Verification?

The resistance to KYC for cryptocurrencies boils down to two factors. Firstly, users believe that with KYC verification processes in place, they would be losing their anonymity. And secondly, KYC verification would mean that the power would be given to a central authority, thus losing the point of a decentralized currency. However, customer’s KYC verification is crucial for eliminating the threat of surging financial crimes through cryptos.

Use Case: How Binance is Making KYC Verification Attractive for End-users

Binance, the largest cryptocurrency platform in the world, is dedicated to meeting KYC compliance requirements. But how is the platform ensuring KYC compliance? By providing extra benefits to KYC compliant customers. Users that comply with KYC regulations are able to enjoy top tier upgrades at a much lower cost. Where unverified users can only withdraw 2 BTC daily, verified accounts can withdraw up to 100 BTC daily.

Conclusion

Cryptocurrency exchanges will need to invest in innovative RegTech solutions to stay compliant with stringent KYC and AML regulations. ID verification systems, for example, are powered by thousands of AI models, making it easy for crypto platforms to verify customer identities and meet compliance targets in a single go. Going forward, it would be interesting to see how crypto platforms adapt to changing compliance regulations, particularly as the long-term survival of digital currencies currently depends on robust KYC and AML regulation and control measures.

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Disclaimer: No warranty is herein provided that the information contained in this document is accurate, up-to-date, and/or complete. In no circumstance(s), does such information constitute legal or any other advice. Any person who intends to use, rely, pass-on, or re-publish the information contained herein in any way is solely responsible for the same. We suggest to verify the information and/or obtain expert advice independently if required.

Latest News

News
Blockchain and NFTs - Setting New Standards for Cybersecurity and Identity Management
What is KYC for Crypto?
The Unsatisfactory Track Record of Crypto KYC Compliance
Europe – KYC Verification and AMLD6
North America – FINTRAC and FinCEN
Asia – Varying Approaches in China, Singapore, and Thailand
Why are Crypto Exchanges Hesitant towards KYC Verification?
Conclusion
Non-fungible tokens (NFTs) are an evolution over the emerging concept of cryptocurrencies. As finance systems are getting modernized, consisting of innovative trading and loan systems for different types of assets, ranging from lending contracts to real estate and artwork. However, by making digital representations of physical assets like painting, NFTs are the most advanced form right now to re-invention the finance infrastructure. Thus, the idea of representing physical assets in digitized form is not new, however, these concepts are combined with the significance of tamper-resistant blockchain of smart contracts.

Contrarily, blockchain and NFTs are also playing a crucial role in making the digital ecosystem secure, as fraudsters are becoming more sophisticated and are capable of exploiting cybersecurity systems. Thus, by utilizing the potential of blockchain technology and NFTs, an entirely new level of security can be attained.

Blockchain Technology – Revolutionizing Cybersecurity and Identity Management In Digital Ecosystem

Primarily, blockchain technology is the key driving force behind the success and emergence of cryptocurrencies. This technology is completely transforming the concept of payment gateways along with enhancing cybersecurity concerns. Blockchain technology utilizes cryptography to make transactional records that are unchangeable and can’t be tampered with. NFTs are also backed by this technology and are uniquely categorized through a cryptographic token that provides an extra layer of security by ensuring that each digital asset and transaction records are well- managed, easily being tracked and verified. In addition to this, NFTs are also designed to digitally represent physical assets, which has brought significant opportunities for businesses as well as individuals.

NFTs are now also being used to virtual depict something scarce, for example, in-game add-on features and other collectibles. Due to the unique identity of NFTs, they are providing more improving identification measures while enhancing cybersecurity. In addition to this, NFTs and blockchain technology are also empowering digital businesses to develop virtual ledgers to store cryptocurrencies and digital assets while maximizing security levels. However, the combination of blockchain and NFTs is considered the most advanced way of securing sensitive information and holds the necessary power to completely transform the use of the internet and cybersecurity.

Despite the fact, blockchain is the backbone of the digitization of payment gateways, it is setting new standards in the cybersecurity domain as well. By providing financial institutions and other businesses a decentralized platform to secure data, they tend to protect the companies through various cyber-attacks and financial losses. It also allows businesses to gather and maintain track of customers’ identities. Blockchain technology is signifying security innovations through the following aspects;

Security through Blocks: Blockchain basically works as a distributed ledger that stores and maintains a continuously growing list of client data records called blocks. Each respective block placed in the database is accompanied by a cryptographic hash of the previous block, a timestamp, and transaction data. The immutability feature of blockchain technology allows it to provide businesses and individuals with a sound sense of security and data protection. Other than this, it also backs businesses to determine and authenticate their identities before getting them on board and ensures data is not compromised.

Private and Public Blockchains: The concept of private and public blockchain is growing concerned nowadays. A private blockchain allows companies to communicate information without a designated central authority. On the other hand, the public blockchain databases are easily accessible to any individual in the digital ecosystem. However, both types of blockchain databases are highly secure and can not be exploited, as they deliver the maximum level of transparency. As a result, blockchain ledgers are becoming an ideal place to store digital data or assets.

Decentralized Technology: Blockchain technology allows both businesses as well as individuals to store cryptocurrency and private information in decentralized databases with a high level of encryption. With the decentralization feature, blockchain assures that hackers can get access to one’s identity. However, hacking attempts are impossible, as cybercriminals need to penetrate 51% of the blockchain system at once.

Smart Contracts: The emerging concept of the smart contract is getting global attention, as they are powered with blockchain technology that automatically handles the customer’s transactions and other dealings. They have attained customer trust by enforcing high-end security standards by being transparent and tamper-proof. Other than this, the financial firms are also using smart contracts to manage customer identities and PII. This also enables businesses to curb identity fraud.

Influence of NFTs on Cybersecurity and Identity Management

As businesses are going digital, keeping sensitive information secure and tamper-proof is becoming more difficult than ever. However, Non-Fungible Tokens (NFTs) are one of the crucial ways to make cybersecurity and identity management systems secure and unhackable. Many global firms are adopting NFTs to secure their client data.

The following are a few examples of how NFTs can be used to promote cybersecurity:

Integrated Security Features

NFTs aren’t directly used but are combined with other security measures to increase the productivity of cyber security systems. This includes, encrypting the messaging services, and generating digital ownership signatures on transactions. Other than this, NFTs also interact with identity verification services through authentication, to assure the customers are onboarding with legit identities. Despite all benefits, NFTs are also being used to uplift security measures as they are hard to replicate and link to other virtual assets. The cryptographs also improve data protection. Furthermore, NFTs can also provide an extra level of security for businesses and individuals, aiming to secure their transactions or operations.

Smart Encryption and Validation

NFTs come up with a “smart encryption and validation” method that enhances the effectiveness of security systems, making them secure. This system is particularly designed for the businesses that are providing trading services. NFTs smart encryption and validation uplift the identification and security of public as well as private blockchain databases.

Thus, the encryption and validation technology of NFTs is inevitable. It imprints digital signatures to each asset or transaction making it impossible for criminals to replicate it. This is how NFTs are preventing stealing of assets in the digital ecosystem.

How Shufti Pro Can Help

NFTs and blockchain technology are considered as the optimum ways to overcome identity fraud and financial crimes. Proof of ownership and digital signatures ensure that the data remains unbreachable. This concept will allow SaaS providers to enhance online identity verification solutions and cyber security protocols.

Shufti Pro’s state-of-the-art online identity verification services are an ideal solution for every type of business providing digital services. AI-backed ID verification services enable companies to determine the identities of customers before getting them onboard with 98.67% accuracy in less than a second.

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Latest Regulatory Updates on KYC Verification for Crypto Exchanges

What is KYC for Crypto?

The Unsatisfactory Track Record of Crypto KYC Compliance

Europe – KYC Verification and AMLD6

North America – FINTRAC and FinCEN

Asia – Varying Approaches in China, Singapore, and Thailand

Why are Crypto Exchanges Hesitant towards KYC Verification?

Use Case: How Binance is Making KYC Verification Attractive for End-users

Conclusion

Blockchain Technology – Revolutionizing Cybersecurity and Identity Management In Digital Ecosystem

Influence of NFTs on Cybersecurity and Identity Management

Integrated Security Features

Smart Encryption and Validation

How Shufti Pro Can Help

Top 10 Technology Trends That Will Reshape the Travel Industry

1. Augmented Reality and Virtual Reality

2. Video KYC

3. AI-Powered Identity Verification Solutions

4. Automating Actions with Voice & Robotics

5. Contactless Payments and Self-Check-In

6. AI Chatbot

7. Big Data

8. Hassle-free Experience Recognition Technology Systems

9. Personalizing Passenger Journeys with Wearables & IoT

10. Making Security Seamless with Artificial Intelligence

Final Thoughts

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Let’s prove your customer’s

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