During the bull market of 2017, most crypto services lacked the proper know your customer and anti-money laundering measures. Even in 2020, 56% of the 800 cryptocurrency exchanges and OTC trading desks analyzed were following weak KYC practices, according to a report from CipherTrace. However, the current rally in digital assets has rocked the crypto market.
As a result, KYC and AML have become top priorities for cryptocurrency providers, with many industry players rushing to implement appropriate measures to get to know their customers better. And it is not only the suppliers who are increasingly demanding KYC, but also their customers.
This trend started in January 2021, when users started to get more involved and show more willingness to pass these procedures. Prior to the current bull market, only 20% of our clients who started the sign-up process were fully verified. Now that rate has risen to 33%, which marks a 65% increase in willingness to take KYC.
It has become clear now that the attitude of crypto companies and users towards KYC in crypto has changed dramatically in recent months.
Double-edged sword crypto exchanges only work now
While adherence to KYC metrics is the norm in mainstream finance, it is a rather controversial topic in the crypto community. On the one hand, many users refuse to disclose their data, arguing that it goes against the fundamentals of crypto, and they don’t want companies and regulators telling them what to do. On the other hand, KYC helps crypto services protect their users.
For example, when a person cannot log into their account for whatever reason, the provider can easily restore user access in case it is properly verified. This would be impossible on exchanges that do not collect any customer data.
That said, it took some time for cryptocurrency exchanges to adopt KYC measures. As companies’ appetite for risk varies and each vendor maintains a different level of trust and security on their platform, these metrics are more important to some than to others.
Whether a service provider decides to implement KYC measures due to regulatory compliance or trade preferences, it is not uncommon for users to encounter problems when attempting to comply with such procedures. For example, it can become painful for a user to wait longer than a week (or even a few days) for a crypto exchange’s customer support team to verify submitted documents.
However, with proper management, governance and implementation, such problems can be avoided while fostering trust between the company and its customers. This sends the message that the company takes its customers and their safety seriously, dedicating its time and resources to protecting them and their funds.
The need for KYC
There are several factors behind the increased interest in implementing appropriate KYC measures among crypto firms. One of the first reasons has to do with the current bull market for digital assets.
The rapid growth in cryptocurrency prices usually means an exponential influx of new users into the exchanges. Some market players could not cope with this sudden influx and decided to make their KYC procedures more stringent to limit the number of customers on their platforms, allowing only those who wish to create an account who wish to confirm their identity.
Besides investors, traders and service providers, bull markets also present a good opportunity for hackers and fraudsters who are increasingly targeting the crypto industry. For this reason, exchanges look to KYC and AML to ensure the safety of their clients while limiting fraudulent transactions on their platforms.
At the same time, regulators have focused on digital assets, researching and drafting laws to manage a strong, high-growth industry. As regulation takes place in the industry, KYC is becoming one of the main pillars of compliance in the financial services industry. For this reason, he will be the focal point when regulators implement a framework around crypto.
Crypto users shouldn’t worry about KYC metrics
In addition to businesses, end users are also starting to understand that proper KYC measures reduce their risk, increase the level of trust in the platform, and effectively protect them while using the service. With the continued growth of interest in cryptocurrencies, exchanges are becoming more responsible and the implementation of KYC alongside other required controls, such as fraud monitoring, helps them to reach this goal.
More importantly, the increasing adoption of KYC metrics is not something industry players should fear. This is a sign of a mature market and the gradual adoption of digital assets among traditional finance companies.
Ultimately, the earliest companies that devote their resources to successfully merging customer success with effective security measures will succeed and become the major players in the industry.
The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of UKTN.
Konstantin Anissimov is the executive director of the international cryptocurrency exchange CEX.IO. He holds an MBA from the University of Cambridge. As a member of the CEX.IO board of directors, Konstantin is responsible for corporate governance. He also has extensive experience working with various markets around the world including UK, European Union countries, China, South East Asia and South Africa. He has strong technical background in web development and the Ethereum blockchain.