Lawsuits Show Crypto KYC Can Help Recover Losses

One of the biggest issues virtually all crypto regulations seek to fix is the need to identify the parties in every transaction, which is difficult given that blockchain technology is specifically designed to be “trustless” in a way that allows owners and sellers to hide behind cryptographic pseudonyms.

While it will always be possible to hide behind cryptocurrencies’ private keys and wallet addresses with a little expertise and an unhosted wallet, it’s going to get harder and harder as know-your-customer (KYC) regulations kick in with the legislation elected officials and oversight agencies are writing in the U.S. and passing in the EU’s MiCA legislation.

See also: EU Agrees on Strong AML Checks for Crypto With an Exemption for Unhosted Wallets

But it does come with benefits, as a pair of top exchanges demonstrated this week. One was Coinbase, which accidentally priced one Georgian lari at $290 instead of $2.90 for customers off-ramping fiat held in their account wallets, CoinDesk reported on Sept. 2. that it is “taking action to retrieve the improperly withdrawn funds” from clients’ bank accounts.

The second was Crypto.com, which also had some decimal issues. Last May, the exchange alleges in a lawsuit, it sent a woman 10.5 million Australian dollars (about $7.1 million) when she tried to withdraw 100 Australian dollars. By the time they figured it out in February the woman had already spent more than 1.35 million on a house, it alleged in the Aug. 26 filing.

The firm has won a default judgment in its suit, CNBC reported on Sept. 1.

There are a couple of lessons to be drawn from the case that any company transacting in cryptocurrency should draw from these cases.

Irreversible

First, it highlights the impossibility of halting or reversing any transaction, so decimal point mistakes and other overpayments require the goodwill of the recipient. Which in turn requires the ability to identify the recipient.

While that does have the very big benefit of eliminating chargeback fraud, it works in the other direction. This means that there’s a very good reason to work with a crypto payments technology firm that has the capability to collect KYC personal identification data beyond complying with anti-money-laundering (AML) laws — which is plenty of reason all by itself.

See more: How Crypto Shields Merchants Against Chargeback Fraud

The reason Coinbase and Crypto.com were able to simply trace these losses and ask banks to freeze funds is because both collect the KYC data that made it possible. This is something that more than a few overseas and decentralized finance, or DeFi, exchanges and lending platforms don’t do.

Of course, because it was fiat currency, those exchange accounts were connected to bank accounts that offer another way to track people. But in the case of stablecoins or other cryptocurrencies, there would be no hope, and sometimes not even a way to inform the recipient of the mistake and ask for the funds back.

Beyond Money Laundering

Second, the cases highlight the value of KYC laws in general, which may (or may not) protect the personal data used for AML compliance from being used for marketing. Not only does it make transaction participants traceable, but it also does so without giving them the ability to demand chargebacks as there’s no third-party bank or credit card issuer to enforce them.

And longer term it will make everyone easier to trace, as the way blockchain security firms are able to trace pseudonymous users is by following the web of connections built by almost all crypto token transactions until one leads to a wallet address that has some KYC information.

Read more: Crypto Basics Series: Is Bitcoin Really Anonymous and How Can Law Enforcement Track It?

Sort of like how the people indicted recently for the 120,000-bitcoin (about $2.4 billion with bitcoin at $20,000) Bitfinex exchange heist in 2016 were tracked because one allegedly bought a $500 Walmart gift card — which required KYC information.

See here: Crypto Crime Series: Bitfinex Using $3.6B Seized in Hacking Arrests to Cover Shadow Banking Losses

But that also means that as a crypto owner touches more and more places requiring KYC, the more strands on that web may lead to the center

Finally, it highlights another effect of the lack of third-party financial middlemen: Any action you want to take to try and retrieve funds from a client who paid by crypto largely means going to court at this point.

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