Although cryptocurrencies such as Bitcoin, Ethereum and Dogecoin arebecoming more mainstream, it’sstill a relatively newsector. As such, regulation of the crypto industry is continuing to evolve as financial industry regulators review and scrutinise the practices ofcryptocurrency exchangesand other crypto companies topreventmoney launderingandidentitytheft.
Unfortunately, as the value of somecryptocurrencieshas increased exponentially in the last few years, so too has the interest of fraudsters.With consumer interest growingrapidly, vast amounts of money being transferred worldwide and regulators playing catch up, it has created a near-perfect breeding ground for identity fraud and money laundering.
Fraudsters have exploited weaknesses in the security ofcryptoexchangesbycreatingnewaccounts using fake identitiesand using stolen identities to take over existing accountsand empty wallets of anyavailablecoins.Given the scale and sophistication of these attacks, crypto exchanges and other crypto companies have been quick to recognise that greater security and regulation is needed.
Today,cryptocurrenciesare coming under increasing regulation. That means that all organisations that allow consumers and organisations to buy and sell cryptocurrencies must comply with severalAnti-Money Laundering (AML) and Know Your Customer (KYC) regulations.In short, this means thatcryptocurrency exchangesand other crypto companiesmust quickly adapt.
Commonpractices like asking users touploadacopyof their IDand a photo ofthemselves or their signatureare no longer sufficient. Not only do they not meet KYC and AML standards,but they can alsobe faked with images stolen from social mediaor personal information sharedon the dark web.
Crypto companiesmust embrace morerobust identity verificationmethods tocheckthe identity of their usersand safeguard their assets. Yet whilecomplying with regulation is a top priorityfor many organisations operating in the crypto sector,it’s also important todelivera convenient experience for users when they arecreatingaccounts,logging in or making trades.A balance must be struck.
ID Verification Explained: What is Identity Verification on the Blockchain?
Companies log and track every interaction and behaviour you exhibit in an attempt to make your life easier in some way. For example, Facebook is pioneering some new AI bots in their messenger app so you can order flowers with a simple verbal instruction. A lot of this new information is attributed alongside traditional ‘static’ identity data. This ‘dynamic’ identity provides a much more real-time view of who users really are. Why does this matter? Because compromising this new dynamic identity could mean that new types of fraud and privacy invasion reach all-time highs.
As crypto companies seek to strike this balance between security, compliance and convenience, many are now using sophisticated identity verification solutions to verify the identity of users. Typically, ID verificationservices work by processingdata from a range of different sources to check and verifythe identity of account holders. As well as ID documents, this can include contextual data, such as phone numbers and IP addresses, or third-party data, such as voter registration information. By consulting multiple data sets,crypto exchanges and other companiescan significantly reduce the risk of identity fraud.
There are several important moments whencrypto companiesmay need to verifya users’identity such as customer onboarding. Some of the most common include whenusersare opening anewaccount,making a high-valuetrade or attempting to transfer the contents of a wallet elsewhere.
In many of these moments,usersmay be asked to provide proof of identity. This could be by typing in a unique code sent to a mobile device or e-mail addressoruploading a photo of an ID document, so this can be authenticated against third party data, and taking a photo or video of themselves.
Yet, while identity checks can help to reduce fraud and build trust,many usersexpect to be able to create and use accounts easily with minimal friction.Cryptocompaniesmust strike a balance between enhancing theuserexperience and protecting profits, but that can be easier said than done.
Crypto Identity Verification: Why is Identity Verification Important?
Fraudsters are increasingly using false or stolen identitiesto target crypto companies. Some of the most common threats that organisationsin the crypto sectorare facing today include payment card fraud, phishing attacks and transfer fraud.Agrowing number of fraudsters arealsousing account takeovers to impersonate realusersfor financial gainor to move dirty money around.
This, in turn, is damaging trust and impacting growth, assome usersfeel less safebuying and selling cryptocurrencies.In fact, athird of consumers believe their personal information is available for sale, while two in five people are concernedthattheir personal information could be exposed whenthey aretransacting online, according totheGBG State of Digital Identity 2020 report.
In the fight against fraud, digital identity verification is an important part of crypto companies’ arsenal, providing the information needed to quickly spot and stop fraudsters at scale, while delivering the seamless and secure experience that users now expect when trading online.
