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Technologies as disruptive as cryptocurrencies rarely have an easy route to mainstream adoption. Being conceptually complex, they tend to experience difficulties in establishing the public’s trust. Fortunately, cryptocurrencies and blockchain technology more generally are being integrated into the everyday operations of an increasing number of industries, which should be a cause for optimism among those invested in the future of decentralized finance.
However, this general increase in crypto transactions has also spurred a rise in fraudulent activities. For example, a Cryptocurrency Crime and Anti-Money Laundering Report from August 2021 found that cryptocurrency thefts, hacks, and frauds had totaled $681 million that year. Blockchain’s ability to ensure anonymity has been taken advantage of by malicious actors, including terrorist organizations, to finance illegal activities while remaining outside of the purview of traditional financial watchdogs.
As a result of these activities, an increasing number of governments and regulatory authorities are stepping in to create crypto-specific regulation, policies and practices. Enterprises who understand the benefits of cryptocurrency and wish to realize its potential to increase the transparency and efficiency of online transactions will need to gain a firm grasp of these regulations and update their practices accordingly.
There are two key terms to understand when it comes to crypto regulations: anti money laundering (AML) and know your customer (KYC) compliance. Money laundering is a form of fraud which refers to the integration of illegally obtained money into the legitimate financial system, and AML compliance refers to the laws and practices that regulatory agencies have designed in order to prevent it. KYC standards are one of these practices: they are procedures that help businesses verify the identity of a customer before entering into a business relationship with them, often requiring customers to provide and verify government-issued photo ID.
Different nations and governing bodies have adopted a variety of AML regulations and KYC requirements. Last year, the European Union announced the Sixth Anti-Money Laundering Directive (6AMLD), which expands the scope of the Fifth Directive to include a broader definition of money laundering and stricter penalties for infractions. For example, criminal liability has been extended from individuals who directly benefit from money laundering to include any “legal persons”--such as companies and partnerships–that are involved in any capacity, including aiding, abetting, and inciting. Moreover, minimum jail sentences have been increased from one year to four.
The U.S. has also taken continual steps to help its AML framework keep pace with the growth of cryptocurrency exchanges. Like the EU, the U.S. has sought to crack down on illicit financing by putting increased regulatory pressures on third parties, such as investment advisors, lawyers and accountants. The Financial Crimes Enforcement Network (FinCEN) declared improving the safety of “virtual currency” a priority in 2021, citing national security concerns based on the increasing use of cryptocurrencies among criminal actors. To this end, they have proposed reviving a controversial rule that requires even unhosted or self-hosted crypto wallets to implement KYC procedures in the form of collecting details (e.g. names and home addresses) from anyone seeking to transfer cryptocurrencies into their private wallets.
Know Your KYC
These numbers point to a clear need to stay ahead of AML regulations. However, this process can prove difficult and time-consuming, especially among smaller businesses and those looking to scale. Traditional KYC processes often involve third-party intercessors, place undue burdens on end-users (especially during the onboarding process) and can be slow to adapt to regulatory changes.
Fortunately, new technologies have emerged which make user verification, during both the onboarding and transaction processes, seamless as well as secure. Rather than relying on passwords or two-factor authentication, modern KYC requires users to verify their identities by providing government-issued ID and a video selfie. Moreover, effective KYC solutions do not require ID verification during onboarding alone–which can expose users’ accounts to fraud–but perform KYC checks at certain trigger points during the user’s journey, creating additional conveniences for users who have already successfully certified and simply need to re-verify.
Identity authentication procedures that make use of biometric authentication are poised to make passwords a thing of the past. While many recent smartphones or laptops use biometric authentication in the form of fingerprint scanning, fingerprints, like passwords, can be separated from the user and employed for malicious purposes. By contrast, facial recognition technology, when coupled with liveness detection–which uses live video to verify the user’s immediate physical presence and match it to their uploaded ID–ensures that only the specific individual who seeks to access the account is able to do so. Platforms that use blockchain technology to keep information stored on the user’s device, eliminating the need for third party intervention, will provide end users with the most streamlined verification experience possible.
Building Up Trust
As Bitcoin becomes more accepted in the broader financial world, more of the general public will undoubtedly take notice. While the presence of more regulations from governments and other regulatory bodies will be one crucial factor in securing the public’s trust, companies themselves can take the lead in spurring on the more widespread adoption of crypto transactions. Implementing security solutions that are intuitive to use and highly secure–such as facial recognition and liveness detection–will help businesses gain a competitive edge by cutting costs while providing users with an unprecedented degree of security over their data.
While AML and KYC requirements might seem like potentially threatening impositions from above, they also serve as a welcome challenge for crypto-based companies looking to improve and expand their services. The crypto space is a relatively new one, but the old axiom about putting the customer first still applies: enterprises that work to empower their customers and build a solid foundation of trust will be the architects of a future in which crypto transactions are the norm.
About Dave McGibbon
Dave McGibbon is the CEO of Passbase, a leader in the identity verification space. Passbase makes facial recognition, liveness detection, and ID verification accessible through a suite of flexible developer tools. As a cybersecurity expert, Dave empowers his clients in crypto, fintech, gaming and other industries by ensuring that their transactions are both secure and efficient.
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.