KYC And AML: Boosting Trust And Taking Crypto Adoption To The Next Level
Unlike bank transfers, credit card payments, and other transactions in traditional finance (TradFi), cryptocurrency exchanges on the blockchain happen without intermediaries. Users can transfer value with faster processing times, cheaper costs, limited counterparty risks, and less reliance on banks.
However, the peer-to-peer nature of cryptocurrency transactions also enables parties to remain anonymous. As anyone can create a digital asset wallet without providing their real information, connecting someone’s wallet address with their real-world identities can be challenging. From the $2.4 billion Bitconnect Ponzi scheme to the $460 million Mt.Gox hack, cybercriminals have been leveraging crypto’s anonymity to steal funds from victims, launder money, sell on the darknet, and perform other illegal activities. The total cryptocurrency value received by illicit addresses has grown from $8.4 billion to $20.6 billion between 2020 and 2022.
As a battle-tested TradFi solution, crypto projects’ mandatory compliance with Anti-Money Laundering (AML) and Know-Your-Customer (KYC) protocols can effectively combat illicit activities within the industry. However, a clear framework tailored to suit the market’s unique characteristics is needed to achieve this goal.
AML and KYC Frameworks: A Must for Crypto Companies?
With the recent crackdowns and new regulatory frameworks, regulators worldwide are gradually expanding AML and KYC requirements to crypto organizations in order to enhance transaction transparency and combat illicit activities. Based on the jurisdictions, compliant digital asset projects may include centralized exchanges (CEXs), centralized finance (CeFi) providers, stablecoin issuers, and specific decentralized finance (DeFi) protocols. For these market players to operate legally within a particular jurisdiction, they must comply with KYC and AML frameworks.
“You are in the no-risk zone if you have received your Bitcoin or Ethereum only from certified centralized exchanges and never bought coins from an unknown person,” said AMLBot Co-Founder Slava Demchuk “Still, if you are a business and our solution is aimed at businesses, the risk is much higher, as there are a lot of bad actors in the space.”
Failure to follow regulations has significant consequences. According to the AMLBot blog, US regulators have imposed $2.5 billion in penalties for crypto-related violations to date. Severe punishment for non-compliance is necessary to enforce regulatory laws, which are there to protect user funds and make the industry a safer place. In exchange, compliant organizations are deemed trustworthy to handle funds, increasing investor confidence, fraud cases, and other illicit schemes.
Additional Benefits: Boosting Security
Besides building trust, AML and KYC compliance can significantly boost the security of cryptocurrency platforms, and companies like ChainAnalysis and AMLBot provide a wide range of services for this security. It helps businesses better protect their users while fighting illicit activities targeting the ecosystem. For example, a crypto organization can leverage AML protocols to identify perpetrators.
“This is a huge benefit, as no one wants criminals on their platform, especially a company that has to comply with strict regulations,” added Demchuk.
Cryptocurrency service providers can monitor criminal activity with AML and KYC to alert their customers about wallets connected to illicit transactions. By blacklisting these addresses and notifying their audience, businesses can protect users from legal trouble and minimize the chances of falling victim to fraudulent schemes.
Compliance with KYC and AML is mandatory for many crypto companies and provides tremendous benefits for the industry. As platforms crack down on criminal activity, they are becoming more secure, stable, and trustworthy. Consequently, investors are becoming more confident in the industry. The result is a boost in business activity as platforms compete with each other to answer increased market demand.
The Key to Mainstream Crypto Adoption
Complying with AML and KYC is undoubtedly the way to go to protect business interests and help create a safer crypto ecosystem. Demchuk echoes this sentiment, adding that mass implementation of AML and KYC “builds trust in society about the crypto industry.”
For that reason, AML and KYC are key to shifting the general attitude towards crypto from a fraudulent Ponzi scheme or a bubble that resembles the 1600s’ Dutch Tulipmania to a reliable asset class that plays a vital role in the global economy.
In the end, a safer, more trustworthy, and compliant industry is what we need to boost crypto adoption and onboard billions of mainstream users.
