Cryptocurrencies are becoming more popular daily, with more and more beginners deciding to play the field and join the crypto world. One of the biggest reasons why the world of cryptocurrency exchanges attracts different types of people is because of the mysteries associated with it. It is challenging to know which coin will become a new hit and which will shortly lose its value, or which one is popular only because it is a meme coin and which one has a long-term value. All of this must be considered when joining the cryptocurrency exchange and choosing your coins. But, no matter how scary this might seem, it is still so exciting that people can’t resist trying their luck.
The danger of cryptocurrency exchanges
The cryptocurrency market is volatile, with coin values constantly changing, making it a risky investment for anyone; just take Bitcoin, for example. It experienced incredible growth of 125% in 2016 and more than 2,000% in 2017. And this growth can’t even be compared to the record rise in 2021 that tripled the numbers from 2017. Unfortunately, 2022 wasn’t as good a year as the previous one, dropping its value to slightly over the 2017 numbers. While this is the danger and reality of cryptocurrency exchanges, it is not the biggest. Cryptocurrency exchanges face the constant risk of being attacked by cybercriminals or investigated by regulators.
Cryptocurrency exchanges are among the favorite victims of cybercriminals and fraudsters. This fast and anonymous market makes it easier for them to conduct their malicious actions without getting caught. They have a large arsenal of fraudulent methods, from spear phishing, social engineering, identity theft, malware, or website defacement, and all of them can cause significant damage to crypto exchange. Because of how fast the money is moving, they can get away with millions of dollars in crypto funds with just one successful attack while facing the minimum risk of being caught. The same anonymous and fast-paced market puts crypto exchanges in danger of unknowingly becoming accomplices in money laundering, human trafficking, or terrorism financing. Luckily, there are regulations in place and significant fines that come with breaking those regulations that try to ensure that never happens while at the same time protecting customers from illicit crypto companies. While these are two entirely different dangers, the solution is the same for both: implementing KYC and identity verification for crypto.
What difference can identity verification and KYC make in the crypto market?
Every business is in danger of becoming a victim of a cyber-attack, especially those working with finances. Attacking these types of companies offers them more opportunities for financial gain as they can steal money and confidential information that can be sold on the black market or used in future attacks. Cryptocurrency exchanges take pride in being anonymous and instantly processing transactions, making it even easier for criminals to accomplish their goals. But we do not have to accept it. Cryptocurrency exchanges are implementing KYC and identity verification to ensure they stay protected from malicious activities and comply with government regulations while causing minimal customer friction. The truth is that it is essential to know who your customers are and that they are legitimate parties for the safety of the business and the customers.
Know Your Customer (KYC), and identity verification allows companies to confirm their customers are who they claim to be while assessing their risk factor. Implementing KYC will enable them to:
- Verify customer identity
- Determine their risk factor
- Determine if there are any money laundering or terrorism financing risks associated with customer
- Determine the legitimacy of their funding
Its ultimate goal is to protect the business and its customers from malicious actions while ensuring the company stays compliant with government regulations. This is especially tricky without help from KYC and AI as the market is constantly changing, and regulations vary from country to country.
How to successfully conduct KYC and identity verification?
The use of cryptocurrencies is more common than ever before, with many companies, especially eCommerce ones, considering the implications of accepting them in their business. To ensure this is safely done, it is essential to take necessary security steps. Implementing KYC can help you highlight suspicious behavior and prevent malicious activities before any damage can be done, but only if done properly.
KYC can’t be a one-size fits all solution as every business is different, and not only will all of them have different requirements, but also because outside circumstances will constantly change. It needs to be able to adapt to them. Compare how different your security expectations would be for a business that holds your confidential information or deals with your finances than for the one that doesn’t have anything sensitive about you. Would you do business with a bank that protects your finances only with the username and password? Of course not, and the same goes for cryptocurrency exchanges.
Every business will have different KYC requirements, but the essential details they need will generally be the same. To confirm the customer’s identity company will need:
- Full name
- Date of birth
- Residential address
For example, this is what an eCommerce site will ask. But, crypto exchanges need more rigorous verification, which is why they also require a photo of a valid government-issued ID card, such as a passport or a driver’s license. Now they can use the provided information to verify your identity. Some crypto exchanges and financial institutions take a more vigilant approach and implement additional security steps. From multi-factor verification, selfie, or video verification to digital footprint analysis, there are numerous steps you can take to ensure your business remains safe from any malicious actors.
Malicious actors are constantly trying to devise new ways to make a profit, whether through cyber-attack or money laundering. The best way to do it is by exploiting innocent companies and their customers. It is no longer an option to stay passive and hope you won’t be impacted by their actions, especially when running a high-risk business such as a cryptocurrency exchange. This is why KYC and identity verification are essential for any cryptocurrency exchange that wants to protect its clients.