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During 2017’s bull market, most crypto services lacked the proper Know Your Customer and Anti-Money Laundering measures. Even in 2020, 56% of the analyzed 800 cryptocurrency exchanges and over-the-counter trading desks followed weak KYC practices, according to a CipherTrace report. However, the current digital asset rally has turned the crypto market upside down.
As a result, KYC and AML have become top priorities for cryptocurrency providers, with many industry players rushing to implement proper measures to better know their customers. And it’s not just the providers that are increasingly demanding KYC, but also their clients.
This trend began in January 2021, when users started to get more involved with and showed more willingness to pass these procedures. Before the current bull market, only 20% of our customers who started the registration process became fully verified. Now, this rate has changed to 33%, which marks a 65% increase in willingness to pass KYC.
It has become clear now that the attitude of both crypto businesses and users toward KYC in crypto have changed drastically in recent months.
The double-edged sword crypto exchanges are only wielding now
While compliance with KYC measures is the standard in traditional finance, it’s a rather controversial topic in the crypto community. On the one hand, many users refuse to disclose their data, arguing that it’s against the core principles of crypto, and they don’t want companies and regulators to tell them what to do. On the other hand, KYC helps crypto services in protecting their users.
For example, when someone is unable to log into their account for whichever reason, the provider can easily restore access for the user in case they are properly verified. Doing so would be impossible on exchanges that do not collect any customer data.
That said, it took quite some time for cryptocurrency exchanges to adopt KYC measures. Since the risk appetite of businesses varies and each provider maintains a different level of trust and security on its platform, such measures are more important for some than for others.
Whether a service provider decides to implement KYC measures due to regulatory compliance or business preferences, it’s not unusual for users to face issues when attempting to comply with such procedures. For example, it can become painful for a user to wait over a week (or even a few days) for a crypto exchange’s customer support team to verify the submitted documents.
However, with the right management, governance and implementation, such problems can be avoided while promoting trust between the business and its customers. Doing so conveys the message that the company takes its clients and their security seriously, dedicating its time and resources to protect them and their funds.
The need for KYC
There are several factors behind the increased interest in implementing proper KYC measures among crypto businesses. One of the first reasons is related to the current digital asset bull market.
Rapidly growing cryptocurrency prices usually mean an exponential influx of new users into exchanges. Some market players couldn’t cope with this sudden inflow and decided to make their KYC procedures stricter to limit the number of customers on their platforms, allowing only those to register an account who are willing to confirm their identities.
In addition to investors, traders and service providers, bull markets also present a good opportunity for hackers and fraudsters who are increasingly targeting the crypto industry. For that reason, exchanges are turning to KYC and AML to ensure their customers’ security while limiting fraudulent transactions on their platforms.
At the same time, regulators have been turning their focus toward digital assets, researching and drafting legislation to manage a strong, high-growth industry. As regulation takes place in the sector, KYC is becoming one of the main pillars of compliance in the financial services industry. For that reason, it will be the focal point when regulators implement a framework around crypto.
Crypto users shouldn’t worry about KYC measures
In addition to businesses, end-users are also beginning to understand that proper KYC measures decrease their risks, increase the level of trust toward the platform, and effectively protect them while using the service. Given the continuous growth in interest in cryptocurrencies, exchanges are becoming increasingly responsible, and implementing KYC alongside other required controls, such as fraud monitoring, helps them achieve this.
Most importantly, the rise of adopting KYC measures is not something industry players should fear. It is a sign of a maturing market and the gradual adoption of digital assets among traditional finance companies.
In the end, the early adopter businesses dedicating their resources to successfully merge customer success with effective security measures will succeed and become the key players in the industry.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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 across the world, including the United Kingdom, European Union countries, China, Southeast Asia and South Africa. He has a strong technical background in web development and the Ethereum blockchain.
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