During the bull market of 2017, most crypto services lacked appropriate Know Your Customer and anti-money laundering measures. Even in 2020, 56% of the 800 cryptocurrency exchanges and over-the-counter trading desks analyzed followed weak KYC practices, according to a CipherTrace reportHowever, the current rally in digital assets 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 take the right steps to get to know their customers better. And it’s not just the providers who are becoming increasingly demanding of KYC, but their customers as well.
This trend started in January 2021, when users became more involved and more willing to go through these procedures. Before the current bull market, only 20% of our customers who started the registration process were fully verified. Now this percentage has changed to 33%, which represents a 65% increase in willingness to pass KYC.
It has now become apparent that attitudes of both crypto companies and users towards KYC in crypto have changed dramatically in recent months.
The double edged sword crypto exchanges now handle alone
While adherence to KYC measures is the standard in traditional finance, it is a rather controversial topic in the crypto community. On the one hand, many users refuse to disclose their data, arguing that this is 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 to protect their users.
For example, if someone is unable to log in to their account for any reason, the provider can easily restore access to the user if it is properly verified. This would be impossible on exchanges that don’t collect customer data.
That said, it took a pretty long time for cryptocurrency exchanges to take KYC measures. Since companies’ risk appetite varies and each provider maintains a different level of trust and security on their platform, such measures are more important to some than others.
Whether a service provider decides to implement KYC measures because of regulatory compliance or business preferences, it is not uncommon for users to experience problems trying to comply with such procedures. For example, it can become painful for a user to wait more than a week (or even a few days) for a crypto exchange’s customer service team to verify the submitted documents.
However, with the right management, governance and implementation, such problems can be avoided while fostering trust between the company and its customers. Doing this conveys the message that the company takes its customers and their safety seriously and devotes its time and resources to protect them and their funds.
The need for KYC
There are several factors behind the increased interest in implementing the right KYC measures among crypto companies. One of the first reasons is related to the current bull market for digital assets.
Fast-growing cryptocurrency prices usually mean an exponential influx of new users to exchanges. Some market players were unable to cope with this sudden influx and decided to tighten their KYC procedures to limit the number of customers on their platforms, so that only those who are willing to confirm their identity could register an account.
In addition to investors, traders and service providers, bull markets also offer 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 the safety of their clients while limiting fraudulent transactions on their platforms.
At the same time, regulators have turned their attention to digital assets, researching and enacting legislation to manage a strong, fast-growing industry. As regulation takes place in the industry, KYC is becoming one of the main pillars of compliance in financial services. For that reason, it will be the focal point when regulators implement a framework around crypto.
Crypto users don’t have to worry about KYC measures
In addition to businesses, end users are also beginning to understand that the right KYC measures reduce their risks, increase trust in the platform, and effectively protect them while using the service. Given the continued 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 the adoption of KYC measures is not something that industry players need to fear. It is a sign of a maturing market and the gradual adoption of digital assets by traditional finance companies.
Ultimately, the early adopter companies that deploy their resources to combine successful customer success with effective security measures will succeed and become key players in the industry.
The views, thoughts and opinions expressed here are solely of the author 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 has an MBA from Cambridge University. As a member of the board of directors of CEX.IO, Konstantin is responsible for corporate governance. He also has extensive experience working with various markets around the world including the United Kingdom, European Union countries, China, South East Asia and South Africa. He has a strong technical background in web development and the Ethereum blockchain.