{"id":85687,"date":"2020-10-09T18:59:00","date_gmt":"2020-10-09T15:59:00","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/memo-to-crypto-exchanges-kyc-compliance-can-be-a-competitive-advantage\/"},"modified":"2020-10-09T18:59:00","modified_gmt":"2020-10-09T15:59:00","slug":"memo-to-crypto-exchanges-kyc-compliance-can-be-a-competitive-advantage","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/memo-to-crypto-exchanges-kyc-compliance-can-be-a-competitive-advantage\/","title":{"rendered":"# Memo to crypto exchanges: KYC compliance can be a competitive advantage"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a2554a5951c5\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a2554a5951c5\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/memo-to-crypto-exchanges-kyc-compliance-can-be-a-competitive-advantage\/#%E2%80%9CSome_lag_behind%E2%80%9D\" >\u201cSome lag behind\u201d<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/memo-to-crypto-exchanges-kyc-compliance-can-be-a-competitive-advantage\/#A_European_paradox\" >A European paradox?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/buradabiliyorum.com\/en\/memo-to-crypto-exchanges-kyc-compliance-can-be-a-competitive-advantage\/#Regulators_can_do_more\" >Regulators can do more<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/buradabiliyorum.com\/en\/memo-to-crypto-exchanges-kyc-compliance-can-be-a-competitive-advantage\/#Decentralized_exchanges_wont_be_exempt\" >Decentralized exchanges won\u2019t be exempt<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/buradabiliyorum.com\/en\/memo-to-crypto-exchanges-kyc-compliance-can-be-a-competitive-advantage\/#KYC_has_limitations\" >KYC has limitations<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong># Memo to crypto exchanges: KYC compliance can be a competitive advantage <\/strong>&#8221;<br \/>\n<img decoding=\"async\" src=\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5ldS1jZW50cmFsLTEuYW1hem9uYXdzLmNvbS9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjAtMTAvNWExYWVjMzMtZDQwNS00Mzg1LWExNjEtOGRjNDIyZDFmMTVkLmpwZw==.jpg\" \/><\/p>\n<div data-v-17f60ba6=\"\">Crypto intelligence firm CipherTrace released a study on Oct. 1 reporting that more than half of the world\u2019s cryptocurrency exchanges had deficient customer identification processes in place against money laundering. On the same day, the United States government announced that it had formally charged BitMex, a top virtual asset service provider, for \u201cfailing to implement required anti-money laundering procedures,\u201d among other things.<\/p>\n<p>The two events, surely unrelated, nonetheless <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>ear to be part of an emerging compliance picture. Dmitri Laush, CEO of GetID \u2014 an identity verification solution provider \u2014 told Cointelegraph: \u201cThe recent U.S. Commodity Futures Trading Commission lawsuit against BitMEX is a prime example that regulators take these matters seriously.\u201d <\/p>\n<p>More regular scrutiny of virtual asset service providers, or VASPs, should be expected, Laush suggested, and it will probably not be restricted to centralized cryptocurrency exchanges. Thomas Hardjono, chief <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/technology\/\" data-internallinksmanager029f6b8e52c=\"4\" title=\"Technology\" target=\"_blank\" rel=\"noopener\">technology<\/a> officer at MIT Connection <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/sciencee\/\" data-internallinksmanager029f6b8e52c=\"5\" title=\"Science\" target=\"_blank\" rel=\"noopener\">Science<\/a> and Engineering, told Cointelegraph: \u201cI believe that decentralized exchanges will inevitably have to comply with U.S. Bank Secrecy Act regulations and the [G7-initiated] Financial Action Task Force Recommendations.\u201d As for the global compliance report from CipherTrace, Laush stated, \u201cunfortunately that does not surprise me at all.\u201d He commented further:<\/p>\n<blockquote><p>\u201cEven Binance, one of the biggest and most famous crypto exchanges used not to require KYC for withdrawals below 2 Bitcoin. Many crypto-to-crypto exchanges, even those with high trading volume, like Huobi and HitBTC, do not require users to submit to any identity verification processes.\u201d<\/p><\/blockquote>\n<h2><span class=\"ez-toc-section\" id=\"%E2%80%9CSome_lag_behind%E2%80%9D\"><\/span>\u201cSome lag behind\u201d<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Know Your Customer regulations are designed to make concealing the origins of illegally obtained money more difficult for criminals. KYC rules are often linked with Anti-Money Laundering regulations, but AML is broader and can include, in addition to a KYC process, steps like risk assessment, compliance training, ongoing monitoring and internal audits. Elena Hughes, director of compliance advisory at the Gemini exchange, told Cointelegraph that the report\u2019s findings are not surprising: <\/p>\n<blockquote><p>\u201cThe strength and effectiveness of the Anti-Money Laundering regulatory landscape varies widely from jurisdiction to jurisdiction, and while many jurisdictions have made great strides in advancing regulatory frameworks to address unique aspects of cryptocurrency, some remain lagging behind.\u201d <\/p><\/blockquote>\n<p>As an example of how KYC can thwart would-be criminals, the CipherTrace study <a rel=\"nofollow noopener noreferrer\" target=\"_blank\" href=\"https:\/\/ciphertrace.com\/2020-geo-risk-report-on-vasp-kyc\/\">recounted<\/a> how one VASP demanded that a suspicious account holder participate in a video call to verify the individual\u2019s identity, \u201cThe account holder refused \u2014 preventing him from using the VASP to launder funds,\u201d the study states. Furthermore, KYC processes can go beyond simple ID checks to include \u201cdocuments that prove your address \u2014 e.g. utility bill \u2014 and source of income, like a hiring contract,\u201d according to Laush, who then added:<\/p>\n<blockquote><p>\u201cWhen it comes to big clients wishing to trade or withdraw large amounts of money, customer due diligence procedures can be applied, including sanctions watchlist checks and politically exposed person lists checks and more.\u201d<\/p><\/blockquote>\n<p>Hardjono also said he was not surprised by the study\u2019s findings, given that the VASP industry is still in its incipient stages: \u201cThe crypto industry should give itself a timeline or deadline \u2014 i.e., a point at which they should be KYC-compliant to the same degree as banks and traditional financial institutions.\u201d He further added that \u201cthe crypto industry could agree that by the end of 2023 the majority will be compliant to the U.S. KYC regulations.\u201d<\/p>\n<p>Clearly exchanges must do better, continued Hardjono. First, they should invest in building their internal KYC-compliance infrastructures. \u201cThis may mean embracing emerging standards, such as <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/trip-and-travel\/\" data-internallinksmanager029f6b8e52c=\"10\" title=\"Trip &amp; Travel\" target=\"_blank\" rel=\"noopener\">Travel<\/a> Rule Information Sharing Alliance that enable VASP-to-VASP identification.\u201d Second, he believes that they will need to invest in data-protection and data-privacy solutions for customer information, particularly as some jurisdictions, such as the European Union, have strong privacy regulations.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"A_European_paradox\"><\/span>A European paradox?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When it comes to Europe, the CipherTrace study found that 60% of European VASPs had \u201cweak or porous\u201d KYC processes, and six of the world\u2019s ten most KYC-deficient countries were European. How does one reconcile a <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/general\/\" data-internallinksmanager029f6b8e52c=\"3\" title=\"General\" target=\"_blank\" rel=\"noopener\">general<\/a>ly strong regulatory environment in Europe with so many noncompliant VASPs? Hardjono told Cointelegraph:<\/p>\n<blockquote><p>\u201cI think this points to the nascency of the entire crypto industry, and the fact that blockchain networks are not geographically bound. This is possibly why Markets in Crypto-Assets regulations are being developed in the EU. The real question is how the MiCA regulations will be enforced across all EU nations \u2014 Western Europe to Eastern Europe.\u201d<\/p><\/blockquote>\n<p>Laush noted that crypto regulation is now evolving rapidly in Europe: \u201cAfter the Danske bank money laundering scandal last year, the regulations for every financial institution were tightened in Europe.\u201d For example, the Estonian government has made it harder to obtain crypto licenses.<\/p>\n<p>Given that regulators in the U.S. and Europe may be zeroing in on crypto exchanges, what should VASPs be doing to boost KYC and AML compliance? Pawel Kuskowski, CEO of blockchain analytics platform Coinfirm, told Cointelegraph, \u201cSource of funds and crypto transactions monitoring are critical. There is very fast-moving illicit funds transfer that needs to be stopped when reaching exchanges.\u201d <\/p>\n<p>In Chainalysis\u2019 2020 Crypto Crime Report, the firm suggested that crypto exchanges need to extend KYC scrutiny for over-the-counter trade desks \u2014 which, while attached to exchanges, often act independently. Jesse Spiro, global head of policy at Chainalysis, told Cointelegraph that crypto exchanges should be looking at implementing a range of tools: \u201cOutside of travel rule compliance, exchanges need to implement fraud and AML systems more broadly. That could include better KYC and enhanced due diligence tools, vendor services, transaction monitoring, and sanctions screening.\u201d <\/p>\n<h2><span class=\"ez-toc-section\" id=\"Regulators_can_do_more\"><\/span>Regulators can do more<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>There are also steps that regulators themselves might take to make it easier for exchanges to comply with KYC and AML. According to Kuskowski, \u201cRegulators should agree to thresholds for transactions and related checks.\u201d For instance, KYC might not be required for crypto transactions of less than $100 \u2014 there would be only source-of-funds monitoring. For crypto transactions between $100 and $1,000 in value, only simplified KYC might be required. This would help enforcers to focus on the larger, more meaningful cases. <\/p>\n<p>Spiro would like to see more advisories and guidance provided by regulators. These \u201chave been extremely beneficial to the industry, as they provide specific information related to risks, typologies, and more.\u201d Certain agencies like FinCEN produce a steady stream of such documentation. Other agencies might do likewise, he proposed: <\/p>\n<blockquote><p>\u201cMore broadly, implementation of AML regulation by jurisdictions is important in supporting exchanges. Implementation and adoption of regulation has been spotty on a jurisdictional level, a year after the FATF released their virtual asset recommendations.\u201d<\/p><\/blockquote>\n<p>Dave Jevans, CEO of CipherTrace, told Cointelegraph that \u201cregulators should move quickly to codify clear cryptocurrency AML and KYC laws and set realistic expectations for the timing of virtual asset regulation enforcement. Nations such as Singapore have rapidly adopted and are already enforcing travel rule regulations.\u201d <\/p>\n<h2><span class=\"ez-toc-section\" id=\"Decentralized_exchanges_wont_be_exempt\"><\/span>Decentralized exchanges won\u2019t be exempt<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Decentralized exchanges, or DEXs \u2014 a type of DeFi application \u2014 pose particular challenges for regulators. According to the CipherTrace study, \u201cThey often lack any clear regulatory compliance,\u201d therefore, \u201cDeFi can easily become a haven for money launderers.\u201d Decentralized exchanges may have even skewed some of the study\u2019s findings.<\/p>\n<p>Will DEXs, too, inevitably have to comply with BSA-type regulations? Given that DEXs are premised on peer-to-peer trading as well as rules and protocols embedded in software, implementing KYC processes have been largely ignored. Among the 21 DEXs for which CipherTrace could identify a host country (as most of the 51 DEXs examined in the study were effectively \u201ccountry-less\u201d), 81% had no KYC processes at all.<\/p>\n<p>Jevans told Cointelegraph, \u201cThe jury is still out on how DEXs will be treated, but most likely they will be required to comply with BSA-type regulations \u2014 particularly the DEXs operated by large, well-capitalized, centralized firms and organizations.\u201d Europe, in particular, may become problematic for \u201cpure DeFi\u201d players because crypto-asset issuers under the new MiCA directive \u201cwill need to have a legal entity to do business with citizens of Europe.\u201d<\/p>\n<p>In March 2019, Coinfirm examined 216 cryptocurrency exchanges and found 69% of them lacking \u201ccomplete and transparent\u201d KYC procedures. Kuskowski spoke of the progress made: \u201cA good number of those exchanges have improved their policies and procedures. However there are new players, including in the DeFi sector, who highly disregard AML\/KYC.\u201d<\/p>\n<p>Kuskowski, former global head of AML function at commercial banking giant RBS, previously <a rel=\"nofollow noopener noreferrer\" target=\"_blank\" href=\"https:\/\/www.forbes.com\/sites\/pawelkuskowski\/2020\/10\/06\/without-compliance-defis-napster-moment-is-doomed-to-fail\/#52969691559f\">wrote<\/a> an article quoting consultant Adam Cochran regarding DeFi enterprises: \u201cMany people presume there to be some sort of magical \u2018peer-to-peer\u2019 exemption that exists in these laws. I\u2019m not sure where that myth comes from.\u201d<\/p>\n<h2><span class=\"ez-toc-section\" id=\"KYC_has_limitations\"><\/span>KYC has limitations<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>These processes have their limitations, as \u201cKYC cannot save you from hackers,\u201d observed Laush, \u201cyou need to have cybersecurity specialists in the crypto exchange team to prevent users\u2019 wallets from hacking.\u201d The Mt. Gox hack \u2014 the crypto industry\u2019s most notorious heist \u2014 was conducted by hackers who found vulnerabilities in the Japanese exchange\u2019s transaction algorithm. <\/p>\n<p>\u201cKYC is a crucial front-line defense, and having no KYC requirements welcomes bad actors,\u201d Spiro told Cointelegraph. However, KYC policies alone are not enough \u2014 on-chain data might arguably offer stronger risk indicators, he said. <\/p>\n<p>Overall, cryptocurrency exchanges need to show that they\u2019re a part of the financial system and that they\u2019re ready to adhere to current regulations, including the implementation of strong KYC, said Laush, confirming that going through customer identity might make the onboarding process slightly longer, adding:<\/p>\n<blockquote><p>\u201cBut it has its undeniable benefits. First, regulators will see that a particular crypto exchange is a legit \u2014 or legal \u2014 business complying with rules. Second, it will create more trust with customers.\u201d<\/p><\/blockquote>\n<p>Gemini\u2019s Hughes told Cointelegraph: \u201cRecent regulatory actions against noncompliant exchanges highlight that trust is difficult to gain, but easy to lose.\u201d Gemini was one of the first crypto exchanges to conduct KYC before allowing anyone to use its platform. Its user agreement page lists 13 laws and regulations by which it abides, <a rel=\"nofollow noopener noreferrer\" target=\"_blank\" href=\"https:\/\/gemini.com\/legal\/user-agreement#section-welcome-to-gemini\">including<\/a> AML and Counter Terrorist Financing provisions.<\/p>\n<p>Cointelegraph asked Hughes if the existence of so many noncompliant crypto exchanges, as identified in the CipherTrace study, put Gemini at a competitive disadvantage. She answered: \u201cGreater compliance has a cost, but it also has the potential to bring much greater market participants. [&#8230;] We believe Gemini\u2019s \u2018compliance first\u2019 approach is a competitive advantage.\u201d <\/p>\n<p>In sum, more regulation of VASPs is coming, and it will probably be more costly for crypto exchanges to comply with KYC and AML rules, but compliance in the longer term also offers benefits like the ability to attract more conservative investors.<\/p>\n<\/div>\n<blockquote>\n<p style=\"text-align: center;\">For forums sites go to <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/forum.buradabiliyorum.com\/\" target=\"_blank\" rel=\"noopener noreferrer\">Forum.BuradaBiliyorum.Com<\/a><\/span><\/strong>\n<\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\"><strong>If you want to read more <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/news\/\" data-internallinksmanager029f6b8e52c=\"2\" title=\"News\" target=\"_blank\" rel=\"noopener\">News<\/a> articles, you can visit our <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/en.buradabiliyorum.com\/general\/\" target=\"_blank\" rel=\"noopener noreferrer\">General category.<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<p><span style=\"color: black;\"><a style=\"color: #ff9900;\" href=\"https:\/\/cointelegraph.com\/news\/memo-to-crypto-exchanges-kyc-compliance-can-be-a-competitive-advantage\" target=\"_blank\" rel=\"noopener noreferrer\">Source<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;# Memo to crypto exchanges: KYC compliance can be a competitive advantage &#8221; Crypto intelligence firm CipherTrace released a study on Oct. 1 reporting that more than half of the world\u2019s cryptocurrency exchanges had deficient customer identification processes in place against money laundering. On the same day, the United States government announced that it had&#8230;<\/p>\n","protected":false},"author":1,"featured_media":85688,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/s3.eu-central-1.amazonaws.com\/s3.cointelegraph.com\/uploads\/2020-10\/5a1aec33-d405-4385-a161-8dc422d1f15d.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[74859,74860,75141,70934,67874],"class_list":["post-85687","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-aml","tag-cryptocurrency-exchange","tag-kyc","tag-regulation","tag-united-states"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/85687","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=85687"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/85687\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/85688"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=85687"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=85687"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=85687"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}