There’s a strong case to be made that, as a society, we are in the advent stage of mainstream crypto. Consider the following three indicators: Firstly, it’s becoming seen as a normal part of our everyday life. The 2022 Superbowl saw over 112 million people tune in worldwide, with a significant portion watching the half time advertisements for FTX Trading and Crypto.com. There’s also been massive investment in Formula 1 and the English Premier League, with ByBit partnering with F1 champs Red Bull, and Dogecoin and CoinJar sponsoring Watford FC and Brentford FC, respectively. 

The second reason is that crypto is becoming much more stable than before. Many cautious investors were previously discouraged by crypto’s volatility and complexity. It was difficult for the average person on the street to understand its purpose or to predict its movements. That’s all now beginning to change – with more providers and greater participation from the wider public, the market has arguably become more stable and efficient. 

Lastly, crypto is becoming more widely recognised as a mainstream currency, making greater inroads to sit alongside fiat currencies used globally Increasingly, major banking services are offering crypto as part of their services. Revolut, for example, allows you to convert your cash into a wide selection of crypto currencies in just a few clicks. Opportunities have spread to other industries, with car dealerships as an example offering crypto as an alternative to traditional payment methods. 

As we sit on the cusp of a new era for crypto, the question we’re asking is – how critical is Know Your Customer going to be? 

KYC in a nutshell

Know Your Customer (KYC) is a fundamental part of an organisation’s risk management practice 

It involves: 

  1. establishing who your customer is,  
  2. verifying their identity,  
  3. building up a risk profiles of the customer, and then  
  4. monitoring that throughout the lifecycle of their engagement with the company 
What KYC Means

Anonymous by design

Crypto, by nature, takes a decentralised approach. It was originally designed and built in a manner that allows its customers to remain anonymous, and protect their personal information from central governing bodies. Anonymity has been crucial to this development since the very beginning – Satoshi Nakamoto, credited with developing and creating the concept, is a pseudonym used by an unknown individual or individuals – and therefore, the traditional rules of tracking customer information do not typically apply. As a result, KYC poses a major challenge for global regulators when it comes to the increasing growth of crypto.

Crypto organisations have been pressured of late to introduce KYC checks in order to be permitted to operate through global jurisdictions. Binance, for example, recently introduced ID and facial recognition checks in order to operate in, and through, the UK. The Financial Conduct Authority (FCA) has also gone further, cracking down on bitcoin ATMs and ordering the closure of all Bitcoin cashpoints in the UK. For the compliance specialist, some of these restrictions make a great deal of sense in the face of historic and current misuse of cryptocurrencies, as platforms for money laundering, fraud, and financing of terrorism, along with documented links to cyber warfare. 

To add to the complication is the recent rise in popularity of non-fungible tokens (NFTs), digital items – frequently artworks – that are traded for often extremely high values based on their inherent scarcity. In 2020, roughly $120m of NFTs were traded. In 2021, that number was closer to $21.5bn. The concern around NFTs is that they aren’t yet explicitly regulated, and are therefore not subject to the same scrutiny, exacerbating the potential issues around fraud and money laundering. 


Statue of Satoshi Nakamoto, Budapest, Hungary

New world, old solutions

The reluctance across the crypto community to comply with traditional regulation is strong, and its effect is very real. Many argue that it goes against the very foundations of the technology, and undermines the anonymous nature of crypto. As a result of the introduction of KYC measures, some firms – such as Coindesk – have seen huge losses in customer numbers. KYC can introduce friction and cost into the onboarding process, putting new customers off, and ultimately costing the firm more money. 

An additional consideration is whether the regulations are having the desired effect. With a suspected $9bn laundered through crypto in 2021, it’s clear that something still isn’t working. 

Part of the problem is clearly down to the processes and solutions being used, which often struggle to maintain effectiveness at scale as users and transactions increase. This is in part driven by a ‘lift-and-shift’ of traditional approaches to KYC, and trying to make them work in a non-traditional set-up. Another problem is that, unlike traditional FS organisations, in crypto organisations KYC often only enters the process once trading is enabled. This means trading can happen immediately, and any concerns need to be remediated at a later point in time, defeating the whole purpose of the check in the first place; put simply, it does not work. 

Whatever the reasons are, and there are numerous, it’s worth noting that a recent survey suggests that only 31% of crypto exchanges have complete and transparent KYC checks in place.  



What to do?

It’s inevitable, and welcomed, that some form of increased regulation will be introduced into crypto, but what that looks like is still uncertain. What is certain, however, is that if crypto organisations want to continue operating at scale, across global jurisdictions – and protect themselves against the impacts of getting things wrong – KYC should be a key priority for them. 

Contrary to some industry thinking, two things can be true at the same time: 

  • We should be able to live and operate in a world with strict privacy, where pseudonyms and direct, private interactions are possible 

and

  • We should be able to hold people accountable for wrongdoing, finding ways to quickly identify and deal with bad actors 

To do this, we need to ensure the correct balance, designing KYC in a way that doesn’t introduce cost or friction into the customer experience, while ensuring that the solution effectively does what it needs to do. 

By managing KYC in crypto in the right way, organisations will be able to: 

  • Improve customer transparency and trust, leading to greater adoption nationwide and globally 
  • Proactively combat the rising risks of money laundering, fraud and other scams 
  • Continue to improve the overall market stability, allowing firms to scale and grow 
  • Protect organisations’ profit and loss from regulatory and government sanctions. 

There’s no doubt that KYC process are going to become increasingly embedded within crypto, but the key is to use this for competitive advantage through elegantly designed solutions – whether that’s electronic ID verification (eIDV) , automation, streamlined UX or more. It’s all possible, and it’s all up for grabs. 


At Webhelp, we support our clients globally with KYC advice, solutions and implementation. Please get in touch if you have any questions. 

Jonathan Cowey

Business Director, Regulated Services

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