KYC in the Cryptocurrency World: How Much Data Is Really There to Manage?

Introduction: The Pros & Cons of Crypto

There’s no arguing the fact that cryptocurrencies are the next big thing.

As a matter of fact, cryptocurrencies are among the subjects to be discussed in the upcoming G20 Summit in July, 2018. Everyone is buzzing about how this disruptive tech will change how transactions are done in the financial industry (as well as in other industries).

However, despite the popularity of crypto systems, critics have implicated them in illicit activities. And true to these warnings, criminal elements have capitalized on this new tech to defraud and steal.

In 2014, for example, one of the most prominent personalities in the blockchain and cryptocurrency space, Charlie Shrem, was sent to prison for a money laundering conspiracy. His alleged crime was tied to the Silk Road darknet marketplace, and he was accused of helping Robert Faiella launder $1 million worth of bitcoin later used to purchase illegal items.

Shrem failed to report these suspicious activities that happened on his cryptocurrency exchange, BitInstant, and was sentenced to 2 years in prison. His involvement is not the subject of this article, but it can be seen that cryptocurrency companies and exchanges can come under regulatory and government fire.

A Newfound Vigilance

Although the space has been largely unregulated, a renewed government effort to keep the market in check seems to be brewing. Thus far, the majority of such efforts have been centered on know your customer (KYC) and anti-money laundering (AML) regulations.

Governments around the world are becoming more vigilant in regulating cryptocurrency transactions. Exchanges and wallets are now required to report suspicious activities and identify anonymous cryptocurrency users.

And, depending on the situation, failure to comply with KYC requirements could mean suspension of license, severe penalty, and even prison time for the parties involved (as seen in the Shrem example).

So, what does the KYC landscape look like with regards to cryptocurrencies?

The KYC & AML Landscape

Regulators expect cryptocurrency companies to know who they are dealing with.

More and more cryptocurrency companies are becoming desperate to avoid financial or reputational damage, and are taking steps to prove they take this new responsibility seriously.

If you have been in the cryptocurrency space long enough, you’ll recall that exchanges like Poloniex, Binance, and many others did not originally require users to submit any information. Now, however, users are required to upload a form of identification to prove that they are who they claim to be.

And in general, crypto firms are under increasing harassment from regulators. Following Coincheck’s infamous hack in Japan where almost $530 million of digital currency was stolen, two more exchanges in the country — Mr. Exchange and Tokyo GateWay — will be shutting down operations in the country because they can’t uphold the regulatory requirements.

This is in addition to three major exchanges which have already shut down: bitExpress, Raimu, and Bit Station.

Implications For Exchanges & Users

For exchanges who have chosen to comply, they won’t exactly find a cakewalk. The cost of administering KYC is expensive and the amount of time and effort required to collect, validate, store, and maintain the sheer volume of user information is extensive.

Taking a lead from traditional onboarding processes which take anything from 10 days to 2 months per customer, and bring this to cryptocurrency companies which may deal with millions of customers. Then, you’ll get a picture of how much data is involved.

Little wonder why some exchanges are deciding to shut down.

For the user, a lot of sensitive data goes into verification, and should a crypto exchange get hacked or shut down, users may be at great data risk. A typical KYC onboarding process requires users to supply information like name, gender, age, address, and ID.

Considering Bitcoin/cryptocurrency transactions are saved on a public ledger and visible on the blockchain, the degree of sensitive information you disclose can have serious implications on your privacy.

Conclusion: CLEARS offers solutions to the KYC problem

As already evident in traditional financial institutions, regulatory laws don’t get lax; instead they become stiffer, more time consuming, and expensive.

Yes, regulation is a critical step in stabilizing a ‘wild west’ crypto market. That said, it is unnecessarily cumbersome.

Crypto companies with little financial backing may get so caught up in verification process that they fail to perform their core business functions. This is where efficient third-party companies with expertise in regulatory practices come in.

CLEARS, a new Ethereum-based blockchain company, offers cheap KYC solutions to companies that need it. Since their processes are data-less, users get the best of both worlds: time is saved and cost is reduced.