Why crypto KYC is of rising importance


As governments try to make cryptocurrencies secure and safe, there are waves of new regulations being implemented for digital assets.

RegTech company Alessa has released a report that outlines the importance of KYC for crypto.

It stated that cryptocurrency transactions have introduced a new environment that compliance teams need to operate in. It added that as this is a new monetary market, compliance regulations around new currencies and platforms are subject to more frequent changes as regulatory bodies try to adapt.

One of the biggest risks to compliance that the crypto exchange market has brought is with KYC.

Firms need to have processes in place to deal with this challenge. Alessa stated that the Financial Action Task Force (FATF) recommends applying a risk-based approach to virtual currencies.

To verify a customer through a risk-based approach means the firm needs to look at individual customers to assess customer risk. Such a process would require a compliance team to gather a lot of personal information when they onboard the customer, which would allow them to assess their risk level and report any suspicious transactions or activities.

The steps of the process are, gathering personable identifiable information of a new customer, comparing the information to a government-issued identification, checking PEP and sanction lists and monitoring media relating to the customer. After this is completed, they would need to conduct ongoing transaction monitoring.

Alessa continued by highlighting the challenges of crypto compliance. It stated that cryptocurrencies are secured on their blockchains, which allows transactions to be made between anonymous users. While anonymous, the user can complete many transactions in a short period.

This makes the currency type attractive to money launderers and criminals. A report from The Wall Street Journal claimed that crypto-based crime hit a record $14bn in 2021.

 To combat this, firms can adapt their crypto transaction monitoring. One of these changes is gathering identifiable biometric information, such as fingerprint and face scans. Other options are ensuring that all AML/CFT transaction monitoring processes are completed before any crypto assets are transferred and monitoring and preventing the creation of multiple accounts so a customer cannot get around reporting thresholds.

It also suggested that firms monitor for transactions and behaviour that is out of the norm for customers or consider adding solutions with real-time or AI capabilities.

 Similarly, a real-time KYC screening solution will help firms monitor and detect all transactions, regardless of their frequency or speed.

Read the full report here.

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