How digital verification is helping to fight crypto fraud
Tags: Compliance, Kyc, Cryptocurrency, Aml Compliance

How digital verification is helping to fight crypto fraud Trulioo Follow Jun 17 · 3 min read

Cryptocurrencies and stablecoins are finally emerging as a mainstream market, pushed along faster now by the global impacts of COVID-19. For all the damage it’s done in many industries, one upside of the pandemic is that it has advanced and expanded the use of online banking and digital payments services, alongside increased adoption of cryptocurrencies.

That’s the good news. But the bad news is that cybercriminals love digital money. It ticks two main things on their checklists: global online access and lingering confusion as the sector becomes more organized. In such a climate, shrewd online criminals are reaping the benefits.

PYMNTS’ June AML/KYC Tracker®, developed in collaboration with Trulioo, examines the issues around protecting cryptocurrency exchanges from money launderers who rinse unlawful billions using the vulnerabilities of the cryptocurrency industry. The Tracker states that:

One common avenue for money laundering is cryptocurrency, a burgeoning market expected to be valued at $2.2 billion by 2024. Its skyrocketing popularity obscures an ever-expanding web of money laundering schemes and other cybercrimes: experts predict that cryptocurrency-related crimes totaled $4.3 billion in 2019, including $2.8 billion in laundered money. This is up from $1 billion laundered in 2018, and the problem is expected to rise as cryptocurrencies become more popular.

Helping to make cryptocurrencies safe is a core ability of identity verification solutions, which are now poised to play a critical role in hardening defenses around this growing cryptocurrency usage.

Exchanges need to up their game

The Tracker also notes that lax security is plaguing the cryptocurrency industry, creating gaps that can be exploited.

Part of what is fueling money laundering and other cybercrime on cryptocurrency exchanges is that the majority of these exchanges have few methods in place for verifying their users. One recent study found that 56% of cryptocurrency exchanges have weak or nonexistent KYC systems that do little to prevent money laundering.

Worse yet is the fact that many exchanges deliberately obscure their country of origin to avoid having to comply with any sort of KYC guidelines at all, which only worsens the global money laundering problem.

Compare this to banks and financial institutions, which are using groundbreaking identity verification technology that employs artificial intelligence, machine learning (ML) and massive data sets to manage increasingly strict regulations.

Some cryptocurrency players are meeting the demand for improved AML/KYC compliance by partnering with third-party providers to more effectively onboard their users. One example is cryptocurrency exchange platform Metal Pay, which recently integrated Trulioo GlobalGateway to ensure efficient customer onboarding that complies with strict AML/KYC regulations. As Metal Pay operates in 24 countries with 30 different cryptocurrencies, it needed a solution that was able to function in multiple global markets, provide a seamless experience for customers and also allow for quick expansion.

Banks and regulators want crypto verified

According to the Tracker, many banks still view crypto exchanges as the “Wild West” — a reputation that isn’t helped by things like “mixing sites” — a common practice among cryptocurrency users in which users “mix” their currencies in a pool with other users and then withdraw the same amount they put in, attempting to obscure the link between their blockchain identifiers and their real-life identities.

These behaviors don’t foster the atmosphere of trust that is vital to the future of cryptocurrencies.

This is where connected commerce and device data come in, enabling digital currencies to be trusted by all users and making them part of the payments experience. Better monitoring and analysis capabilities will help narrow the opportunities for bad actors to hide their illicit financial activities among legitimate cryptocurrency transactions. However, it’s vital that the compliance measures don’t unnecessarily slow or complicate the experience.

According to a recent joint survey from Guidehouse Inc., Compliance Week, and the International Compliance Association, one way to potentially smooth over the frictions associated with AML/KYC compliance is through ML technology.

The Tracker further supports this, with 80% of the 364 compliance professionals surveyed saying that ML could potentially reduce compliance risk, with 61% reporting that they had already seen results from ML. These ML applications are in place at several banks, with nearly two-thirds of FIs devoting up to $1 million toward ML and 71% developing their own in-house applications.

Learn how cryptocurrency exchanges can protect themselves from money laundering and other financial crimes.