Is It Time For Cryptocurrency To Become More Regulated?

Should Cryptocurrency Become More Regulated?

The rapid growth of cryptocurrency has come with closer scrutiny and a call for tighter anti-money-laundering (AML), know-your-customer (KYC) regulations.

The U.S. Congress is considering numerous bills to clarify legal issues surrounding digital money, and last month the Financial Action Task Force (FATF) issued a final set of cryptocurrency guidelines to require more transparency of digital asset transactions and prevent them from being used for criminal activities.

This push for regulations hasn’t come without controversy. Some think they go too far. Yet according to the latest AML/KYC Tracker, 30 percent of financial institutions (FIs) report that at least one of their AML components is “somewhat” or “not at all” effective.

The anonymous nature of cryptocurrency, coupled with its irreversible transactions, is especially attractive to scammers and fraudsters.

Adam Goldman, founder and president of Canadian trading platform Bitbuy, explained how the company has focused on security as it helps its user base purchase, sell and trade cryptocurrencies.

“A lot of criminal actors start to get it into their heads that because they’d be using the nontraditional medium of cryptocurrency, there’s no course for law enforcement, so trading platforms like ourselves along with regulators need to catch these actors,” he said.

Exchanges must perform critical KYC, AML and other security and compliance measures to ensure they support only legitimate transactions and keep customers safe from fraud as the cryptocurrency space grows.

Traditionally, AML/KYC was a very slow, manual process involving checking potential customers across government watch lists while onboarding. Digital banking changed all that, and now consumers expect the onboarding process to be near-instant and with minimal friction.

Alain Meier, CEO of Cognito, told PYMNTS in an interview that many FIs focus on bad actors trying to game the financial system while not prioritizing letting the right customers through. False positives can bounce legit customers in the 0.8 percent to 1 percent range, which is more major than it might seem, especially when considering cryptocurrency platforms that have seen an influx of new users.

“Coinbase had more customers signing up during the height of the crypto bubble in 2017 than Bank of America signed up in a year. When we are talking about signing up 11 million or so people in a short window of time, a false hit rate of 0.8 percent means a lot of slow, manual review. There are going to be about 90,000 people who are suddenly not excited about doing business with you,” Meier said.

A clunky onboarding experience can lead potential customers to abandon the process and switch to a competitor. That’s the dead opposite of most FIs’ intent. According to PYMNTS Digital Consumer Onboarding Tracker, 71 percent of FIs said new customer acquisition was a top strategy in reaching their 2019 revenue goals.

Yet, nearly all — 96 percent — of FIs rely on legacy authentication processes to power customer ID verification. FIs doing a 180 and turning to automation to streamline the onboarding process might be going too far in attempts to create completely friction-free experiences, though, said Stephen Maloney, EVP of business development and strategy at Acuant, in an interview with PYMNTS.

“Friction is dependent on the use case,” he said. Sure, buying that large latte from a coffee seller should take as little time and hassle as possible — perhaps just the tapping of a contactless card against a reader — but “transferring $5,000 from a bank account shouldn’t be entirely frictionless.”

Increased focus on onboarding and ID verification has also extended into other areas like mobile wallets and the gig economy where bad actors with fake accounts can use digital platforms to trick the unwary into doing work that will never be compensated or providing property that will end up stolen.

To acquire users quickly, startup online marketplaces often need to onboard as many customers and suppliers as possible to succeed in the early stages.

Passbase, a digital identity firm described as “the Stripe of user identification” by Co-founder and COO Dave McGibbon, aims to facilitate onboarding for SMBs.

Similarly to Acuant’s Maloney, McGibbon said he also thinks the current obsession with friction-free user experiences can be tempered, and verification can be viewed as a necessary part of the user-filtering process.

“Platforms that have high-risk transactions, and where the value exchange is higher value (the sharing economy, for example), are more willing to insert something that has a little bit more friction, but ensures that people who are onboarding are actually [authenticated],” he said.



Digital transformation has been forcefully accelerated, but how does that agility translate into the fight against COVID-era attacks and sophisticated identity threats? As millions embrace online everything, preserving digital trust now falls mostly on banks and FIs. Now, advances in identity data and using different weights on the payment mix afford new opportunities to arm organizations and their customers against cyberthreats. From the latest in machine learning for fraud and risk, to corporate treasury teams working in new ways with new datasets, learn from experts how digital identity, together with advances like real-time payments, combine to engender trust and enrich relationships.