Research Finds 68% Of Crypto Exchanges Don’t Follow KYC Verification – Report

Crime, FinTech, News, Regulation | June 5, 2018 By:

Research firm P.A.ID Strategies has released the results of its analysis into the on-boarding practices of cryptocurrency wallets and exchanges.

The research, commissioned by Mitek, a digital identity verification solutions firm, looked into whether prominent cryptocurrency exchanges and wallets across Europe and the US are using Know Your Customer (KYC) checks when on-boarding customers.

The Cryptocurrency Identity Crisis” shows that of 25 prominent custodian wallets and crypto exchanges examined, 68% are allowing users to trade crypto and fiat currency with no formal identification and no Know Your Customer (KYC) checks. The EU’s fifth anti-money laundering directive, AMLD5, will bring these platforms into line with other financial products such as bank accounts, demanding that checks are carried out on new customers to affirm their identity.

For the 68% of exchanges and wallets that do not meet upcoming regulation, there are no identity verification checks against official identity documents, against Politically Exposed Persons lists or sanctions screening, and no audit trail that would help to trace criminal activity. As well as failing to meet upcoming compliance demands, this could lead to irreparable harm to the reputation of these platforms if they are used to launder money.

The research ranks wallets and exchanges according to how compliant the onboarding process is, with AMLD5 due to come into force next year, plus the speed and simplicity with which a customer can sign up and get started. The below table ranks exchanges and wallets according to their identity verification process.

Company Wallet / Exchange Requires unverified personal information Requires official ID documents to begin trading ID Verification Score (/10)
Coinbase E P P 9
Gemini E P P 9
Poloniex E P 9
itBit E P P 9
Luno W P P 8
Bonpay W P P 8
Mercatox W P 7
Kraken E P P 7
Bitstamp E P P 7
CoinCorner W P 7
QuadrigaCX E P 6
Cex.IO E P 6
Blockchain Wallet W 6
Wirex W 6
Lykke Wallet W P 6
Coinexchange E 5
Exmo E 5
Coinjar W 5
Liqui E 4
Local Bitcoins E 4
YoBit.net E 4
BitPanda W 4
Bitwala W 3
SpectroCoin W 2
Indacoin E P 2

In order to sign up to exchanges and wallets that do not perform KYC, customers only need a verified email address and mobile number. Both of these are easily obtainable without ID—any webmail service such as Gmail or Outlook.com can provide an email address, while in many countries a pay-as-you-go mobile phone would provide the number. Armed with these, users of the services that fail to meet upcoming AMLD5 regulation can buy and sell cryptocurrencies and exchange them for fiat currencies.

“Cryptocurrency wallets and exchanges want to enjoy the same trust as the wider traditional financial services, but for this to happen they need to rise above the sometimes-dubious reputation of cryptocurrency’s past and be seen as ‘model citizens’ of the economy,” said John Devlin, Principal Analyst, P.A.ID Strategies. “Meeting regulatory demands ahead of AMLD5 coming into force could go a long way to changing this sector’s reputation as being something of a ‘wild west’.”

“Wallets and exchanges want to change perceptions of lawlessness and it’s a relatively straightforward fix. Identity verification processes can be—if implemented correctly—simple for the customer and no barrier to signing up,” said Kalle Marsal, COO, Mitek. “By incorporating systems that are just as future-looking as cryptocurrency itself, exchanges and wallets can be both competitive and compliant with regulatory demands.”

Companies surveyed included Kraken, Poloniex, Coinbase, Coinjar, Luno and Bitwala. The report can be downloaded here: https://www.miteksystems.co.uk/resources/cryptocurrency-paid-strategies