Are you trying to understand how the Know-Your-Customer, KYC crypto protocols work for online casinos? Knowing whether you have to meet these compliance standards when signing up at the best crypto casino is necessary. Especially given that it’s a requirement at traditional online casinos.
With the popularity of cryptocurrencies shooting through the roof, crypto exchanges have been under enormous pressure to increase their transactional capacity and keep up with demand. However, interest in cryptocurrencies hasn’t bypassed the watchful eye of regulators, as they have increased their scrutiny of the industry.
Regulators across the globe want to ensure there are safe and fair markets that are free from money laundering and other crimes of a financial nature. In light of this, crypto exchanges have stepped up their crypto compliance procedures to ensure that they are more secure, dependable, and robust.
Why Is Compliance Necessary For Exchanges and Wallets?
It’s no secret that money laundering has become a massive global problem.
The rise of cryptocurrencies has exacerbated this problem, as transacting with digital assets is cheaper and faster, especially for international transactions. Unfortunately, the convenience does make the crypto sector the perfect vessel for criminal activity like terrorist funding and money laundering.
Regulators across the globe have recognised this. In response to the situation, they have made great strides in installing anti-money laundering (AML) legislation to prevent money laundering through crypto exchanges and custodian services.
These AML measures include KYC crypto protocols that help regulators identify and verify each user. Hopefully, these actions will discourage illicit criminal activity on the exchanges.
AML and KYC Crypto Explained
Anti-Money Laundering (AML)
AML is a set of protocols and legal regulations that financial institutions implement to identify and prevent the profitable nature of illegal activities. The protocols are intended to stop activities such as trading illicit goods, tax evasion, market manipulation, and ill-gotten laundering funds.
Regulatory bodies have forced financial institutions to conduct due diligence checks on their clients to flag and report suspicious customers or suspicious transactions.
Money laundering appears in three typical stages, i.e., placement, layering, and integration.
Illicit funds in the hands of criminals are usually placed in a financial system like the crypto market, where there is no requirement to reveal their identity.
These funds are then siphoned to different accounts that could be hosted through various exchanges and wallets.
The final stage sees funds moved in an intricate web until they are used to integrate into something tangible. These tangible results can manifest as purchasing luxury assets or financial or commercial investments.
With cryptocurrencies, criminals leverage the decentralised nature of the platform to launder money covertly. These money laundering techniques appear most prevalent on cryptocurrency gambling websites and money-laundering crypto mixer platforms and exchanges.
In light of this, more robust prevention methods are required to curb the flow of financial crime in the crypto space.
Know Your Customer (KYC)
KYC crypto compliance is the first phase of client due diligence in the AML process. When a client is new to a financial institution, KYC protocols are implemented to identify and verify that the person is who they claim to be.
Armed with this information, financial institutions can assign a risk value to that specific client based on the susceptibility to financial crime.
Because crypto wallets and exchanges operate in a similar light to financial institutions, KYC needs to be implemented into the AML protocols at each of these entities. This would require these wallets and exchanges to collect personally identifiable information for each client, which must be verified against an official database.
Politically exposed persons and those with sanctions against them would easily be identified with measures like this. Moreover, financial institutions could also better understand their clients’ risk of cryptocurrency laundering and financial crime.
Regulation Standards Around The World
As the traditional financial industry evolves to keep up with regulations, cryptocurrencies offer a modern way to transact with straightforward solutions for transferring funds internationally. However, restrictions on cryptocurrency trading are tightening around the world.
For example, the Fifth Anti-money Laundering Directive (AMLD5) in Europe and FinCEN’s Final Rule in the USA explicitly state that cryptocurrencies and the exchanges on which they operate are subject to all AML laws.
Strong AML programs implemented by crypto exchanges and wallets are instrumental in identifying and safeguarding against the suspicious financial activity.
KYC is typically divided into two risk-mitigation layers that are globally recognised. Customer Due Diligence (CDD) and Enhanced Customer Due Diligence (EDD).
CDD is a basic protocol that identifies and profiles new clients. It entails a background check on the new client to understand the level of risk that this new client poses.
EDD is usually conducted on high-risk clients through an additional layer of profiling and questioning.
What Is CFT, and How Does It Fit In?
Combating the Financing of Terrorism (CFT) refers to preventing money movement concerning terrorism. It involves blocking transactions intended to support religious, ideological, or radical political objectives achieved through violence.
Terrorism has a remarkable ability to flourish on decentralised platforms. So, it is critical to identify and stop transactions supporting it to prevent terrorist acts.
Terror organisations often find cryptocurrency an ideal means to fund illicit activities, as cross-border payments are effortless and instantaneous. This is why identification is critical when choosing to transact with cryptocurrencies.
How Are Major Crypto Exchanges Performing KYC?
While many crypto exchanges and wallets seem to be dragging their heels over AML and KYC implementation, mainly because it goes against decentralisation, others have kick-started their processes.
On signing up, new users must provide their full name, birth date, address, phone number, social security number, and valid email address.
In addition, if a user wants to withdraw, they will be required to provide official government documents verifying that identity, such as a driver’s license or passport.
Some exchanges use biometric facial recognition and liveness detection to verify users. Some also have automatic risk assessments that help score users on their susceptibility to suspicious activity on that platform.
With such measures, non-compliant users are cut off, and due diligence for long-term users becomes easier.
Generally speaking, the KYC crypto protocols differ among the exchanges and wallets.
Why Are These Protocols Important For Crypto Exchanges?
Trust and Transparency
For cryptocurrency exchanges to achieve mass adoption, they must gain public trust. Since cryptocurrencies and exchanges are vulnerable to hacks, new clients may find it challenging to trust them with their digital assets. However, when people are confident that their funds are being stored securely, they will be more confident in storing their crypto.
One way to build this trust is through implementing KYC crypto procedures. Effective identification verification systems help exchanges identify who is using their services and separate criminals from authentic clients. Clients are more confident when they know that criminals are kept off the platform. This enables more free-flowing peer-to-peer transactions as people know that anyone they transact with can be identified.
Some red-flag indicators that exchanges and wallets look out for are:
- Single users that create different accounts under different names
- Transactions that are initiated from non-trusted IP addresses
- Insufficient or incomplete KYC information
- Clients who decline requests for KYC documents
- Clients who avoid inquiries on their source of funds
- People who provide false or forged identity documents or photographs
- Clients who are on the watch list
- People who often change their identity information
Lower Risk Of Financial Crime
With effective KYC crypto protocols in place, there is a lower risk of financial crimes such as fraud, bribery, corruption, and terrorist funding happening.
In addition, all users on the platform are identified and verified, reducing the likelihood of high-risk users and criminals taking advantage of the platform.
Stabilises The Crypto Market
Through proper AML compliance, crypto exchanges can prove themselves legitimate and trustworthy entities.
Furthermore, with robust KYC crypto protocols, people know that the exchange or wallet actively conducts risk assessments. This increased trust will help stabilise the crypto market as more clients gain confidence in the system.
Exchanges and Wallets Remain Compliant
Exchanges and wallets that are non-compliant with AML regulations could face stiff fines. Some governments even consider AML non-compliance of financial institutions as a severe risk to national security, as it encourages money laundering and harms economies. However, with proper KYC implementation, exchanges and wallets will protect themselves from heavy non-compliance fines.
KYC Challenges That Crypto Exchanges Face
While solid AML practices and KYC crypto protocols provide a level of surety and accountability, the exchanges and wallets were trying to implement them face some unique challenges.
Expensive To Implement
With more regulations being met, additional costs are arising to remain compliant. As a result, exchanges are expected to outlay costs to register with relevant regulatory bodies and prepare additional budgets for verification processes and bigger compliance teams.
To ensure ongoing monitoring, more compliance staff is necessary. Unfortunately, this has led to a shortage of compliance staff in the market and increased salary packages.
A crucial part of KYC protocols entails sending client documents to a third-party verification centre. The exchanges have to foot the bill for these verification processes. Some exchanges have moved their businesses to less regulated regions to avoid these costs.
Manual KYC Protocols Can Be Frustrating
KYC verification must be conducted separately on each platform and is non-transferable between organisations. This means that clients must go through the process at every exchange they register with. Manual verification can be lengthy, with wait times of up to 30 days. Such long delays can discourage clients from registering and cause them to drop out of the application process altogether.
Traditional Protocols Have Data Security Concerns
Implementing traditional KYC crypto protocols entails collecting, storing, and distributing lots of sensitive information. For this to be successful, extremely tight data security procedures must be installed to prevent this risk of being hacked.
Additionally, with so many KYC applications being processed, sensitive information is being distributed to various outsourced companies to shoulder the burden. This is another opportunity for hackers to strike while information is in the hands of a third party.
Existing Protocols Cannot Scale For Increasing Regulation
Many governments worldwide are planning to create their own central digital bank currencies. At the same time, they are likely to attempt to prevent private digital currencies from outperforming their major centralised ones.
But, considering the regulation pushback against recent digital currencies like Facebook’s cryptocurrency, Libra, it is increasingly likely that new regulations will be imposed when this happens.
With increased regulations, exchanges and wallets will be expected to conduct more frequent and detailed KYC checks. However, as traditional financial institutions find it challenging to cope with the current demands imposed on them, it will be difficult for exchanges and wallets to sustain these KYC crypto protocols amidst massive regulatory changes.
In short, these exchanges may not be able to scale up when necessary.
Final Thoughts
Exchanges and wallets cannot circumvent AML compliance, which is vital to stop criminals from conducting illicit activities on decentralised platforms. However, for every transaction to be above board, effective KYC crypto protocols must be enforced.
AML and KYC implementation are critical in building trust with people and contributing towards safer and secure transacting.
As crypto technology evolves and new opportunities present, you must understand the potential risks and how best to protect yourself. Make sure to choose reputable exchanges and wallets when transacting with your crypto. Be safe and good luck!
