Cryptocurrency Exchanges And Weak KYC Protocols: A Good Reminder About The Spirit Of Compliance

July 16, 2018

The findings of a recent study making waves online might prove disturbing, but beyond the headlines, we have yet another perfect opportunity to revisit AML compliance and what it means in our nascent industry.

The study, conducted by analytics group P.A.I.D Strategies, revealed that 68% of cryptocurrency exchanges do not comply with “Know Your Customer” (KYC) policies.

The group’s research indicates that many major cryptocurrency providers only require customers’ email addresses and mobile phone numbers. These lenient protocols violate KYC requirements, including the collection of specific customer information and verification of customer ID (read: a lot more than an email and phone number).

We can’t comment on the rigorousness (or lack thereof) of the KYC protocols of every cryptocurrency exchange in the industry, but it does prompt a more interesting question; if these exchanges are falling far short of compliance, what does an effective compliance strategy for a cryptocurrency business even look like? Furthermore, if these findings are sound, what can we assume about other cryptocurrency businesses (perhaps yours) that are not classified as exchanges, but are still expected to maintain compliance?

If these questions are freaking you out, you might be wondering what steps you can take today to keep your business compliant, right?

Don’t panic. Here are three key questions we want you to think about.

1. Can You Scale Your Compliance?

The number of cryptocurrency exchanges around the globe has skyrocketed. The total number of cryptocurrency exchanges now exceeds 500, and that number will likely continue to increase.

Now ask yourself these questions:

What are you doing to ensure that your compliance strategy remains effective in a rapidly expanding cryptocurrency industry? Have you invested any money into AML compliance?

Most importantly, do you have a plan for scaling your compliance as your business grows?

Every Cryptocurrency Operation Needs This Secret Weapon

A compliance officer or advisor is vital to a cryptocurrency company’s success. The role serves as a secret weapon, and more importantly, a shield against myriad challenges. But even so, simply employing a compliance officer nominally isn’t enough to execute an effective and adaptive compliance strategy.

To do that, you need to provide your officer with state-of-the-art resources that he or she can use to scale your compliance as the business grows.

The best part? There are cost-effective ways to accomplish this goal. You can start by providing your compliance officer with essential, basic resources. Your department’s software and hardware, for example, should be up-to-date enough for your compliance officer to tackle any compliance issue.


Pixabay

Three Essential Tools Every Cryptocurrency Business Needs

Here are a few different types of cryptocurrency tools that will make the difference between success and failure for your compliance officer:

  • SMS Phone Verification Services: These tools can help businesses adhere to KYC policies. They provide extra layers of security which protect consumers from identity theft.

 

  • Screening Tools: Sanction screening tools allow compliance officers to investigate users. Using these tools makes weeding out criminals easier for your compliance team.

 

  • Blockchain Explorers: Monitoring transactions within the cryptocurrency environment helps your compliance team identify suspicious activity, including crypto linked to the darknet or other nefarious activities.

 

Once you’ve equipped your compliance officer with these key tools, you might consider expanding your compliance department. At the rate the cryptocurrency industry is growing, your existing team could begin to struggle with the onslaught of new rules regulators are throwing your way, not to mention growing consumer demand for crypto.

Back to the three question we want you to think about…

2. Do You Have a Customer Service Department?

We’ve discussed the importance of good customer service strategies for cryptocurrency businesses in the past. Customer service is becoming one of the biggest compliance tools in the cryptocurrency industry, and we expect this will continue in the next few years.

The problem is, cryptocurrency businesses aren’t investing in customer service.

The Consumer Financial Protection Bureau (CFPB) received hundreds of complaints about cryptocurrency exchanges in 2017. The Australian Competition and Consumer Commission (ACCC) received four times that amount in the same year.

We can’t stress this enough: cryptocurrency businesses could have prevented several of these complaints by implementing strong customer service strategies.

Great Customer Service Is Half The Job

The first step to creating a strong customer service strategy is building a customer service department with clear goals. Cryptocurrency companies should organize their customer service departments with two, deceptively simple goals in mind: Customer Satisfaction and Compliance.

At first glance, customer service doesn’t sound like a compliance issue. But here’s the kicker: the relationship between customer service and compliance becomes apparent quickly after you analyze the results of poor customer service strategies.

Consider the complaints the CFPB and ACCC received in 2017. Many of them stemmed from customers’ inability to get responses from the cryptocurrency businesses they patronized. The number of complaints was so significant, it led regulators to impose stricter rules on the cryptocurrency industry.

Here’s the bottom line:

Contact with customers assuages consumer fears and allows businesses to manage customers. If you’re managing customers, those customers are less likely to take their complaints to the people’s court (i.e., the internet), or worse, to regulators.

Our last question might be the most important of all, so stick with us.

3. Are You Keeping Up With Competitors?

If 68% of cryptocurrency exchanges fall short of KYC compliance, that also means that your competitors are either looking to ramp up their compliance strategies, or they’re already ahead of you. Their motivations for doing so likely mirror your own: They want to remain compliant and avoid attracting regulators’ attention, and they want to convert more clients than your business does.

Now consider a possible third motivation:

Your competitors want to set the standard for compliance rather than falling victim to that standard.


Unsplash

Imagine what would happen if the majority of the supposed 68% of cryptocurrency exchanges that do not comply with KYC policies suddenly became compliant. This sudden shift would make non-compliant companies a minority and draw extra (one might say exclusive) scrutiny from regulators. Lawmakers would begin to view the majority’s compliance strategies as essential if consumers benefit.

Notice that the majority group has inadvertently set an industry-wide standard in this example. You want your business to belong to this majority group so you won’t be scrambling to comply once regulators crack the whip.

Bottom line:

Don’t grow your compliance strategy for the sole purpose of keeping up with your competitors. Developing a customer focus and maintaining compliance is more important than besting your peers.

Fulfill The Spirit Of Compliance

One last tip. Complying with KYC policies is necessary for businesses that want to succeed in the growing cryptocurrency industry. By scaling your compliance, developing your customer service strategy, and staying one step ahead of your competitors, you’ll remain both compliant and competitive.

But that’s not all. These steps only meet the letter of compliance.

To be truly successful, every cryptocurrency business should strive to fulfill not just the letter of compliance, but the spirit. Instead of doing the bare minimum, businesses should embrace strong compliance as an integral part of their long-term strategy and goals.

That said, you should always be on the lookout for new AML solutions and compliance strategies. And if you ever need help finding those solutions? Just contact BitAML to speak to a compliance expert today.

Similiar Blog Post

3 SAR filing tips based on emerging best practices

August 17, 2020
This old-fashioned scam is more prevalent than you think — and your customers could be at risk. If you run a cryptocurrency exchange, kiosk...

Can your employees also be your customers?

August 17, 2020
This old-fashioned scam is more prevalent than you think — and your customers could be at risk. If you run a cryptocurrency exchange, kiosk...

How To Get More Out Of Annual AML Training

August 17, 2020
This old-fashioned scam is more prevalent than you think — and your customers could be at risk. If you run a cryptocurrency exchange, kiosk...