In today’s digital age, identity theft and online fraud have become ubiquitous and almost expected as a part of doing business on the internet.
Unfortunately, millions of these instances happen every year, resulting in billions of dollars in losses for businesses, customers, and banks. This eats into profits, adds unnecessary and burdensome costs, and impacts commerce.
With the world going crazy over cryptocurrency, the opportunity for fraud is even more prevalent, which is evident with the various hacks and infiltrations of crypto exchanges across the globe.
U.S. crypto firm Nomad was victim to a $190 million theft, the firm announced. The San Francisco-based company had recently raised $22 million from investors, and now the business is working with law enforcement agencies and blockchain experts “to trace stolen funds, identify recipient wallets, and coordinate the return of funds.” Nomad is now offering a bounty to reclaim the $190 million loss.
The solution – or at least part of the answer – to this widespread problem resulting in losses of hundreds of millions of dollars? KYC.
Wait a minute. What is KYC anyway?
These are three letters that you need to know,
Know Your Customer is the process of confirming the identity of a customer.
The objective is to prevent organizations from being exploited by unscrupulous individuals for a broad array of criminal activities, be it money laundering activities or outright theft.
KYC has become a common strategy worldwide, from India to the United Kingdom to the United States. Canadian legislation mandates that financial institutions ensure that they adhere to the minimum requirements behind KYC.
But since crypto and the broader decentralized economy are still widely unregulated, KYC adoption is challenging. Indeed, some crypto firms still possess business models that allow clients to maintain anonymity and keep their personal information private from a centralized body.
However, whether it is growing pressure from regulators or from Wall Street investors, more crypto firms are embracing KYC.
For example, in August 2021, crypto exchange Binance, one of the largest in the world, announced that new customers would be required to provide government-issued identification and pass facial verification to participate in the platform actively. If clients choose not to comply, their experience on the website will be limited.
The crypto exchanges implementing KYC processes into their platforms are not strictly opposed to the system. Instead, they tout the panoply of benefits, such as shielding funds from bad actors, ensuring the company is not prone to regulatory attacks from the government and attracting fresh injections of capital from newcomers who may initially be apprehensive.
There has been some concern that crypto exchanges would try to avoid KYC requirements by heading overseas and planting operations in jurisdictions without KYC requirements. So far, this has not been as problematic as expected. In addition, a growing number of regulatory bodies are tightening their framework.
Last year, the Ransomware Task Force, a global group of public and private experts, urged the crypto sector to introduce primary KYC efforts or move ahead with more vigorous enforcement.
Indeed, industry observers purport this will be the new normal in the crypto ecosystem as business leaders try to get ahead of the evolving regulation and institute KYC verification mechanisms.
“KYC may also be important in improving crypto’s public image throughout the economy. Stronger compliance via more robust identification procedures could help crypto shed its perceived association with money laundering and other criminal enterprises. This, in turn, could encourage wider adoption and investment,” Coindesk wrote in March 2022.
This brings us to our next point.
Since it is standard practice in the real-world economy to extend ID to companies to prove your identity, what is KYC verification? Whether in the crypto realm or the overall decentralized marketplace, are consumers providing different forms of identification to partake in transactions?
Here is what KYC verification would usually look like in practice.
Individual customers will typically be asked to provide identity information, address, telephone number, and a recent photograph. If these are joint accounts, the other person will need to proffer the same information.
For businesses that create accounts on these outlets, identification data that verifies the legal status of the organization, operating address, and authorized signatories are needed.
Moreover, there are other steps businesses employ to ensure better security, verification, and data collection.
The first tactic is customer due diligence. This consists of firms digging deeper into a background check and better determining the risk assessment of an investor or market participation.
The second method is ongoing monitoring. This means that the company will continuously monitor customers and ensure the provided KYC information is accurate and up to date.