Prime Trust On Pursuit Of The ‘Goldilocks’ Seamless And Secure Onboarding Balance

By  |  March 24, 2021
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Crypto traders are often eager to quickly set up accounts on exchanges so they can begin transacting before prices shift, but platforms risk fraud if they cut corners on KYC checks, says Stephen Cheng, chief compliance officer of financial infrastructure provider PrimeTrust. In the Future of Identity Report, Cheng explains how risk analysis and progressive onboarding can help exchanges balance verification speed with security.

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    Keeping fraudsters out of the cryptocurrency space can be tricky, with businesses often relying on the detection and removal of potential bad actors during and after onboarding. Crypto exchanges — and the solutions providers that support their customer verification procedures — are under significant pressure, however, partly because exchanges operate 24/7, unlike traditional stock markets that close at certain hours. Fraudsters can slip in around the clock, so exchanges need technologies, staff and strategies that allow for the constant confirmation of users’ identities and checking of threats.

    These processes must be rigorous but also swift, according to Stephen Cheng, chief compliance officer and BSA AML officer at Prime Trust, which provides financial infrastructure to crypto exchanges and other FinTechs. This is because cryptocurrencies’ values fluctuate rapidly and investors want to be able to access trading while prices are still favorable.

    “Especially with how volatile crypto prices are, it’s going to be more important to apply technology to give quicker responses to users,” Cheng told PYMNTS in a recent interview.

    That does not mean that crypto exchanges can afford to skimp on security, however. Fraud attacks have ramped up recently, and weak identity verification efforts can lead to serious harm. New crypto users who lose money to fraud could be deterred from digital assets entirely, Cheng warned, and such security failures would send the message that private companies are not able to protect the ecosystem, prompting regulators to tighten their oversight.

    “What [is at stake] when we have fraudsters coming into our ecosystem is a significant economic loss to customers, … further scrutiny [from regulators] … [and] companies that otherwise would have been able to provide valuable services to customers not being able to survive because of the financial loss they’re suffering,” he said.

    Crypto exchanges and companies that support them, like Prime Trust, therefore find it essential to combine both smooth, streamlined onboarding with precise fraud detection.

    “FinTechs live or die by their onboarding process, which includes ID verification,” Cheng said.

    The Goldilocks Goal

    Crypto exchanges seek what Cheng dubs a “Goldilocks solution,” or a coveted balance of strong yet smooth security that is “just right.” These platforms need to have an onboarding verification process that is restrictive enough to block out fraudsters while still simple and permissive enough to approve legitimate users and give those genuine customers convenient experiences, he explained. Exchanges must always be on the lookout for false positives, in which they erroneously flag honest users, as well as false negatives, in which fraud goes undetected.

    Crypto exchanges can come closer to finding that Goldilocks balance by using artificial intelligence (AI)-powered tools to rapidly analyze vast amounts of data and help compliance staff assess new customers’ potential risk levels during onboarding. The crypto platforms can then tailor the rigor of their know your customer (KYC) processes to suit users’ varying situations, helping the exchanges to keep verification and onboarding experiences from becoming too burdensome — or too lax.

    Tailored ID Verification

    Crypto exchanges can best manage their verification processes by understanding the level of risk each customer presents. Regulators already require the platforms to collect basic details, like consumers’ names and government identification numbers as well as business entities’ beneficial ownership details. Exchanges can take this work a step further by examining customers’ specific interests in cryptocurrency, such as whether a given user intends to make fairly simple crypto transactions or more complicated ones, as well as attending to details such as how the market in which a user is located could impact fraud risks.

    “It boils down to a risk-based approach, where we identify the customer type, product type and geographic location, and then, based on that, we would have a risk management framework that would allow us to score the customer during onboarding,” Cheng said. “For example, if a … U.S.-based customer … was using a pretty vanilla product and didn’t have any red flags, they would go through a more frictionless due diligence process.”

    Progressive Verification

    KYC is also never a one-and-done process, and ID verification during onboarding is only the first step. Cheng said that customers and their transactions must be continually monitored, and done so with greater levels of verification required if or when users progress to riskier transactions.

    “After [customers are] onboarded in the system, if we see that their pattern of behavior or their transaction activity is unusual or [there are] abnormalities beyond what we determined as the risk level [associated with them] during onboarding, then we’d supplement that initial due diligence with some enhanced due diligence,” Cheng said.

    Crypto exchanges and their solutions providers may have to fend off serious fraud attacks that could threaten customers’ finances and faith in the cryptocurrency ecosystem, but powerful analytic technologies and meticulously crafted verification strategies can help. Platforms that combine tailored verification approaches and robust risk analysis have the best chance at hitting a balance of seamlessness and security that is just right.

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