The cryptocurrency industry is fertile ground for money laundering and fraud due to the anonymity and untraceability that can often come with services. However, the next evolution of digital assets and services is to be privacy-preserving while being able to verify the identity of the individuals they are servicing. As companies implement new technologies that intersect with finance, asset handling, and transactions, they implementing effective Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures can become a differentiating business strategy to build trust.
Inability to abide by AML regulations may result in serious consequences as regulators increasingly apply financial regulations to companies in crypto and virtual asset service providers (VASPs) more generally. Binance was recently targeted by regulators and another cryptocurrency exchange for not having KYC despite its size and global reach. Private actors, not just governments, care about proper due diligence to protect end-users and customers from fraud and money laundering.
While some organizations may find compliance cumbersome, others have adapted to regulatory changes and succeeded in introducing customer due diligence that is robust and delivers a good user experience. This article will cover five companies powered by Passbase that have incorporated identity verification and KYC to build trust with end-users and grow their business.
Which companies in crypto should care about KYC?
The Financial Action Task Force (FATF), which is an intergovernmental organization that sets global guidelines, defines a virtual asset service provider (VASP) as an actor that facilitates financial activities related to virtual assets such as money transfers or currency exchange. Check our other article to find out whether your company falls under the definition of a VASP.
The implementation of KYC procedures can be beneficial to both companies and their clients. Companies can provide sufficient information to regulators should it become necessary, get to know their customers better, optimize their marketing strategies and offer personalized services. Customers, on the other hand, can enjoy better service, secured accounts through biometric authentication that replace easy-to-hack passwords or 2FA for transaction authorizations.
While the information collected to know your customers (KYC) is broadly the same across markets
Many crypto companies that sit at the intersection of multiple industries, such as gaming and FinTech, need to decide how they think of their business and the regulations they hold themselves accountable to. ZEBEDEE positions itself as a FinTech company developing software for bitcoin and Lightning transactions in digital experiences and environments, providing a digital economy infrastructure for players, developers, streamers, and watchers.
ZEBEDEE has already invested in AML/CFT compliance to know what customers they are dealing with. Identity verification on the platform is part of its KYC process and forms the foundation for fraud detection and regulatory compliance that enables the company to do proper reporting, should it be required by regulators.
Find out more about how ZEBEDEE approaches KYC and crypto regulatory compliance from their Chief Compliance Officer, James Park, in our webinar summary.
AVA Labs for Avalanche Blockchain Protocol
Initial coin offerings (ICOs) were some of the first crypto-related services to come under regulatory scrutiny and many companies may now need to register with a securities commission (SEC) in order to take place. In the case of AVA Labs, digital assets are regulated as securities in the US so the company used the identity verification with Passbase for the ICO.
It took just 4.5 hours to complete a public sale during which 72 million tokens were sold at a total value of $42 million. One component of the sale gave investors who completed a KYC process access to the backup token sale website which only allows purchases for customers.
Privacy-driven companies using blockchain technology are also using KYC to ensure they know what customers they are providing secure digital identities and confidentiality for. Infrastructure companies like Findora help create decentralized, transactional systems for multi-purpose use, whether it is transactions, assets, or programmable contracts that need to be compliant, without compromising on privacy. By incorporating an identity verification and KYC solution like Passbase that is designed for the digital economy, Findora can focus on their core value propositions such as security, performance, and integrations.
Linus not only connects investors with financial services via blockchain, but also provides a high yield cash account offering users interest. As Linus is a financial company that handles crypto, it has gone down the path of meeting AML regulations, which requires knowing your customers (KYC). With Passbase, Linus can do customer due diligence and screen new users that they onboard.
“Passbase has significantly reduced the time and cost of our manual review process as we grow our user base, and it’s invaluable to us to have a partner that so strongly believes in individual privacy and data security." Matthew Hamilton, COO, and co-founder of Linus.
Bitsong is illustrative of how KYC can be used in the entertainment industry. This blockchain ecosystem empowers artists with solutions helping them to increase their revenues with monetization methods. Although its target audience resides outside the world of finance, operations on the platform are running on smart contracts making it fall under the definition of a virtual asset service provider (VASP), which may be regulated in certain countries. KYC procedures used by the platform help to build trust with the community.
Additionally, Bitsong conducted token sales using Passbase’s identity verification for its FAN tokens that could be later on used for transactions on the platform.
How should crypto companies approach KYC?
Countries are adopting regulations for companies in crypto, and VASPs more generally, at different speeds so developing compliance according to FATF recommendations sets companies up for success as regulations harden.
Taking KYC requirements from Customer Identification Programs (CIP) in the US is a good start. The requirement usually includes a name, birthdate, address, and identification number. A digital identity verification would translate to:
- ID document with a photo issued by the government such as a passport
- Biometric verification (facial matching to photo ID)
- Proof of address, for instance, a utility bill
How to use KYC for better customer experiences
It is natural for customers to be reluctant about providing their personal information. However, crypto companies should understand the necessity of identifying their customers and make the process as smooth as possible.
Numerous methods exist to encourage customers to provide their personal information upon registration or making the first purchase. Here are some that a company may start with:
- Transparent communication explaining the reasons for performing identity verification that includes a walkthrough and FAQs
- Education on the security benefits for customers
- Having verified or VIP user benefit if KYC is optional for your service
- Develop a regulatory strategy to create a competitive advantage
With proper information collection and protection processes in place, the level of customers’ trust grows as they experience the compounding benefits of performing identity verification. However, as the process itself requires companies to make initial product and strategic investments. By using solutions that specialize in identity verification and digital identity, a company can focus on improving their unique value proposition to end-users, namely in servicing them more effectively in this new digital economy.
Considering an ID verification solution for your business? Try Passbase for free.