Why crypto exchanges need KYC and AML

Most clients do not want to provide their passport data to crypto exchanges, but it is the exact procedure that can help distinguish a trustworthy platform from fraudsters. However, there are not so many exchanges conducting KYC and AML.

Financial institutions use KYC (know your client) and AML (anti-money laundering) procedures in order to prevent the use of cryptocurrencies for illegal purposes. Thanks to the identity verification, the financial company receives information about both the physical person and the source of his income. Client in his turn gets the opportunity to use the services of the company and, depending on the jurisdiction, some guarantees of protection of his rights.

Why crypto exchanges need KYC and AML

But as for the crypto world, things are a little different, and most crypto exchanges do not meet requirements of the regulators. Researchers at Coinfirm analysed 216 trading platforms and concluded that only 26% of them fulfil the requirements of state agencies for KYC and AML procedures, and for 69% of exchanges the standards were incomplete and non-transparent. At the same time, only 30 sites (14%) received licenses from regulators from the USA, Japan and Hong Kong. Coinsquare, Coinbase, Gemini and Poloniex were the safest from the regulatory point of view.

According to Brightman’s co-founder of legal fin-tech consulting, Christina Nemchinova, thanks to the implementation of AML / KYC procedures, the exchange can protect itself against possible accusations from law enforcement agencies in assisting money laundering and financing of the terrorism.

“A stock exchange that does not conduct AML / KYC compliance is considered unreliable and runs the risk of becoming a platform through which certain individuals may carry out illegal activities. For the client, the choice of the exchange that conducts this procedure also provides an additional guarantee that the site is transparent and operates within the legal framework,” explains the lawyer.

Anonymous trading and VPN

According to Pavel Kuskovsky, the head of Coinfirm, for many people anonymous trading on a crypto market is regarded as a positive aspect of the industry, but at the same time it creates difficulties for businesses and increases the risks of criminal activity.

A good example is the story of the notorious BTC-e Stock Exchange and its administrator Alexander Vinnik. The United States, France and Greece suspect him of laundering $ 4 billion. He is facing a 55-year prison sentence for those crimes.

Theoretically, had BTC-e received a license from government agencies and fulfilled the requirements of AML and KYC, this situation would not have happened. Indeed, instead of suspecting a cryptographic operator, it would be possible to check the legality of the clients’ revenues of the site, and in case of any suspicion, bring accusations to BTC-e users. Therefore, AML and KYC not only gives the exchange trustworthy clients, but also helps to maintain its reputation, which is important in the financial sector.

Because of the suspicious anonymous activity, Coinfirm decided to have a closer look at Binance as well. In its report, the site is marked as having a “high” regulatory risk. This is due to the fact that the KYC and AML procedures are applied only to those customers who perform operations worth more than 2 BTC.

However, according to Gleb Kostarev, Binance representative in Russia and the CIS, a similar restriction exists only for the main trading platform, where fiat couples are not represented. In this case, all crypto-fiat platforms fully comply with local regulation. Therefore, according to him, it is impossible to “launder” money through such platform.

“We believe that the KYC and AML procedures are important and necessary to ensure exchange trading, as we at Binance strictly abide by the regulations active in the countries where we operate. For this purpose last week we entered into a partnership with IdentityMind, which helps exchanges meet KYC and AML standards around the world,” said Gleb Kosterev.

However, Coinfirm draws attention to the fact that Binance does not fully implement its site policy, since customers with limited access can use the services of the site through VPN. According to Christina Nemchinova, such a connection to the platform is still quite risky.

“VPN does not guarantee that government agencies will not identify you. In case of such a “discovery”, tough sanctions and all kinds of fines and in some jurisdictions even imprisonment can be applied to the client. This option is always at the client’s own risk and risk,” explains the lawyer.

What to do if the exchange is registered in a suspicious jurisdiction

According to Coinfirm, another problem of crypto exchanges is subsidiaries in suspicious jurisdictions. That is, the marketplace has additional legal entities that deal with deposits, transfer money, or process payments in a remote country where legal rules are weak or unclear.

So, even though the parent company controls the exchange, the money is transferred through other legal entities. Due of this fact, theoretically, there may be difficulties with money payback in case of loss.

However, according to Kristina Nemchinova, that’s not a problem, since exchanges often have a corporate structure and as a result you can always reveal the ultimate owners of companies.

“There should be no difference for the client, as he would file a lawsuit directly against a legal entity that has not returned the funds. When recovering damages one way or another, they will look for the ultimate beneficiaries of the entire group of companies that can always be disclosed” explains the lawyer.

At the same time, according to the head of Coinfirm, more and more exchanges are looking for partners working in a transparent legal field. And this year unlike in 2018, more and more trading platforms are introducing KYC and AML procedures for cooperation with such partners.

This is definitely a positive trend. After all, the work of crypto exchanges in the legal field determines the rules of the game for crypto companies. At the same time, such protective procedures save the trading platform from money laundering charges, and for customers this is an indicator of a trustworthy trading platform.

Author: Annabella Lapshina

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