KYC: Why it is Vital for Security and User Protection
Dear Community,
Here at Covesting, we pride ourselves in developing a user-friendly platform packed with trading features that also provides investors with cutting edge security. As we get closer each day to our trading platform’s launch in Q3 2018, we wanted to take the chance to discuss and explain some common fallacies and benefits of Know Your Customer (KYC) requirements.
What is KYC?
KYC requirements were first developed by the US’s Financial Crimes Enforcement Network (FinCEN) in 2014 as part of their campaign against money laundering and terrorism financing. The requirements are intended to help financial institutions have better due diligence on their clients, preventing illicit activity and allowing for better security for investors. Since KYC’s implementation in 2014, countries across the globe have adopted similar KYC requirements, significantly lowering the amount of crimes committed through financial institutions.
Implementing thorough and efficient KYC procedures is one of the many reasons that Covesting has swiftly obtained licensing from multiple agencies in multiple countries. We have officially received licensing to operate as a cryptocurrency exchange, financial institution, and a cryptocurrency wallet service in the EU, and we are close to receiving our Distributed Ledger Technology License from authorities in Gibraltar. Our KYC requirements were a pivotal part of receiving our licensing.
KYC requirements also allow for cryptocurrency exchanges to gain important banking relationships, which Covesting has already secured. They also allow for exchanges to have fiat onramps that let investors deposit and withdraw fiat currency directly into the exchange, enabling quick and easy trading.
If you would like to know further details about our licensing and banking relationships, take a look at our June in Review post on Medium!
Common Fears and Fallacies About KYC Procedures
Many cryptocurrency investors view KYC as a worthless procedure that invades their right to privacy and negates the anonymity of cryptocurrency transactions, but this is simply untrue. KYC is, in fact, a simple and important process that is critical for progressing cryptocurrencies on a regulatory front.
Here are some common misconceptions about KYC procedures:
1. Cryptocurrency exchanges are not required to partake in KYC procedures.
In order to operate in countries that have significant trading volume, exchanges must be able to identify their clients. Recently, the South Korean government banned all anonymous cryptocurrency trading accounts, requiring all exchanges operating in the country to institute mandatory KYC procedures. These types of bans on anonymous accounts are becoming very common as more countries begin to put regulatory frameworks in place.
2. Documents required for KYC procedures cannot be stored in a secure way, therefore compromising the private information of investors.
Covesting takes our clients private information very seriously, that is why we will never ask for information that is not required by KYC laws. During KYC, we will never ask for information for marketing purposes or any other purposes besides what is absolutely required. Information Covesting will not request includes job title, household income, employer information or any other irrelevant information.
In addition to only requesting imperative information, Covesting has implemented other procedures to ensure the safe and efficient transmission of data. All our KYC procedures will be handled by an inhouse team committed to our client’s security, and no information will be outsourced. All the information sent to us will be encrypted and stored on a secure storage that can only be accessed by our compliance team.
3. KYC is a long and arduous process.
Covesting’s KYC procedures are actually quick and straightforward. If something goes wrong with any of the KYC information sent to us (like a bad quality document or a misspelling) clients will only be asked to correct and resubmit the incorrect documents, all the other aspects of the application will be saved, sparing clients from the headache of resubmitting all of their KYC documents.
How KYC Procedures Will Benefit Investors
Although KYC was initially created by governments in an effort to stop illicit activities, it also has a myriad of benefits for investors and exchanges.
Major benefits of KYC are as follows:
1. KYC aids the mass adoption of cryptocurrencies as investments and products.
The legal framework surrounding KYC procedures makes it mandatory for exchanges that want to operate in countries with major trading volume. It also lowers the amount of fraudulent and illicit activity in the cryptocurrency markets, which makes governments more willing to institute common sense (no harm) regulations. Without KYC, exchanges like Covesting would not be able to operate as compliant exchanges, making it significantly more difficult for investors to find a diverse array of digital currencies with liquidity.
2. KYC verification protects the assets of investors using compliant exchanges, as they can prove ownership of their investments.
Recently, an investor lost $50,000 on Binance, the world’s largest cryptocurrency exchange. Detailing his unfortunate experience on Reddit, the anonymous user accounted how hackers used his mobile phone number to phish the customer support of his mobile phone provider. The hackers gained access to all the accounts linked to this phone number, including several social media sites, email accounts, and cryptocurrency exchanges. Although the user got his account locked after the hackers withdrew two Bitcoins, he did not want to communicate with Binance through his registered email, as he rightly assumed that the hackers had access to it. After contacting Binance with an external email account not registered with them, they were reluctant to answer his support ticket.
This unfortunate set of circumstances eventually left this user with his remaining account balance locked in his Binance account. Had he registered his account using proper KYC procedures, Binance could have verified his identity regardless of the email and mobile phone number associated with his account. This is one way in which KYC protects users by allowing them to prove ownership over any lost or stolen funds.
With Covesting, if a client ever loses or forgets their credentials, they will be able to restore access to their account by submitting a ticket to the support team and proving their identity. The team will cross-reference their identification with their KYC documents and act accordingly.
3. KYC procedures reduce pump and dump schemes, something that Covesting is working hard to prevent.
Pump and dump (P&D) schemes are frequent in the cryptocurrency markets, especially among low market cap currencies. Because P&D scams target unsuspecting customers and damage the reputation of innocent cryptocurrency companies, Covesting is working hard to combat this type of fraudulent activity.
Instituting mandatory and thorough KYC procedures is one effective method to protect investors from fraudulent trading activities. Recently Syscoin (SYS) was a victim of a pump and dump scheme on Binance, which resulted in lost funds for anyone with high purchase orders set on the coin. During a day of normal trading volume, one SYS, normally priced around $0.20, sold for 96 BTC, triggering all the orders set up to that price and causing the currency’s price to skyrocket 85% just on preset orders alone. Although the Syscoin company acted quickly to suspend trading, investors were damaged by the fraudulent trading.
KYC prevents trading anomalies like this from occurring, and the source of these trades can be found. Investors trading on Covesting can rest assured knowing that their investments and purchase orders are protected from P&D scams thanks to KYC verification.
The Covesting team is hard at work developing a trading platform unlike any other, that allows for individuals and institutions to invest using highly advanced software with cutting edge security features. In order to ensure the safety of our client’s funds and to be compliant with regulation from governments around the world, we are instituting procedures such as KYC.
Please continue to check our official accounts for more updates on Covesting’s progress and for more information on what we are doing to ensure security and regulatory compliancy. Also, be sure to check our Crypto Intelligence Portal for trading ideas, news, and market updates.
Thank you for choosing Covesting, and please feel free to contact us any time with any questions you may have.
Thank you,
Covesting team
