Crypto Scams Are A Genuine Problem. Better KYC Is The Fix.

August 26, 2019
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The cryptocurrency industry is faced with numerous unique challenges. But the most consequential is the need to demonstrate legitimacy, particularly to increasingly hawkish regulators and a skeptical mainstream.

Entrepreneurs are attracted to the space for understandable reasons. Cryptocurrency is new, it’s exciting, and it’s innovative. There’s opportunity. The story of cryptocurrency is still being written, and everyone who joins it gets to be part of that story.

But every story has a bad guy, and new industries, particularly those built on new technology, are also attractive to criminals and scammers.

Ultimately, this means that cryptocurrency business owners automatically inherit an additional responsibility that more established industries don’t really worry about so much — the responsibility to demonstrate legitimacy.

Demonstrating legitimacy depends a lot on how illicit activity is mitigated, and the problem is, there’s no clear way to take direct action on the illicit activity happening in the crypto space.

Let’s say you operate a single bitcoin kiosk in Nebraska. What can you do about phishing schemes and fraudulent ICOs? How can you combat romance or Craigslist scams?

Here’s the deal.

Even if you’re still trying to grow a lucrative, legitimate business from a single BTM, there’s actually a lot you can do through good compliance to combat fraudulent activity and elevate the integrity of the industry.

If you’re a cryptocurrency business owner (and let’s face it, if you’re following our blog, you probably are), congratulations.

You’ve just been drafted.

Common Cryptocurrency Scams Are Becoming More Prevalent

Critics of cryptocurrency frequently point to scam activity in the space as evidence of a fatal flaw.

Rampant scam activity proves, they argue, that cryptocurrency itself is a unique and historic swindle, designed for money launderers and financial criminals. Cryptocurrency being a racket is hardly a bug; rather, it’s a defining feature.

This kind of apocalyptic opinion-making depends on crypto skeptics falling for its formal fallacy. After all, scam activity in an industry does not invalidate the entire industry.

Still, scam activity in cryptocurrency is a serious issue, and one that the industry must do more to contend with. Crypto scam activity reached $1.7 billion in 2018. Despite the price declines of the “crypto winter,” scam activity increased 400% that year.

Scam activity increases might be somewhat expected in a bear market, but 400%? That took even industry watchdogs by surprise.

But that’s not even the worst part.

The $1.7 billion figure is one oft-referenced by crypto critics, and shocking as it is, it’s only an estimate based on what experts have been able to gather from reports. It’s a number calculated from large-scale ICO fraud and exposed Ponzi schemes. It doesn’t necessarily account for the “street-level” common cryptocurrency scams that have been the focus of BitAML’s most recent blog series.

The bottom line is this: there’s a very good chance that $1.7 billion is in fact a low estimate. It’s very likely the number should actually be higher.

If you’re at all skeptical that scam activity is a serious problem in crypto, hopefully, this got your attention.

What Can Cryptocurrency Businesses Do, If Anything?

These sobering figures are catnip to crypto critics.

They can also leave honest cryptocurrency business owners, ones operating within compliance and in good faith, distraught about the future of their businesses and the industry itself.

Worse yet, they leave a good number of us feeling helpless.

But here’s the deal. You’re not responsible for policing the cryptocurrency industry.

You are, however, responsible for policing your business.

And if everyone takes that responsibility seriously, the industry itself will improve.

Policing your business is a matter of good compliance, and the more legitimate cryptocurrency money service businesses (MSBs), money transmitters, and other financial institutions embrace compliance, the less dominant scam activity will be.

And, the more legitimate the industry becomes.

“This is all very aspirational, but vague” you might be thinking. “What should I be doing to prevent scam activity and protect my business right now?”

It all comes down to robust Know Your Customer (KYC) controls and transaction monitoring, both essential to the day-to-day health of a cryptocurrency MSB’s compliance.

Below, we put together three quick tips every business can focus on for better KYC to reduce or mitigate scam activity in the space, starting with the transactions they process every day.

Let’s start with…

KYC Tip #1: Adopting Strong Identification Protocols

KYC is all about knowing who your customers are and why they’re coming to you to do business.

Though the anonymity of cryptocurrency is appealing to many, you can’t turn a blind eye to who your customers are and why they are transacting with you as a cryptocurrency MSB/money transmitter and also maintain strong compliance in accordance with the law.

You simply cannot do both things at once.

Rather, your institution needs to come up with a series of data points to collect on each customer depending on the size of their transactions.

Regulators have already prescribed what kinds of data cryptocurrency businesses should be collecting at each transactional level.

Work with your BSA Compliance Officer or a compliance expert with a focus on cryptocurrency to make sure these protocols are compliant and robust.

KYC Tip #2: Customizing Transactional Red Flags To Your Institution

Crypto Scams Are A Genuine Problem. Better KYC Is The Fix. - BitAML BlogWhether someone is transacting through your institution for the first time, or a customer you’re on a first-name basis with requests something out of the ordinary, you should have a customized list of red flags you refer to for any unusual behavior.

Potentially suspicious behavior could be anything from an unusually large transaction size for a particular customer, or failure to produce identification. A follow-up interview may clarify these discrepancies, or result in more red flag behavior.

For instance, if during the course of a customer interview, said customer becomes skittish about answering questions, it could signal potentially illicit activity.

Alternatively, imagine a customer mentions something about “winning the lottery” or “needing to pay an electricity bill.” This could be evidence that the customer is the victim of a scam in progress.

Red flags should be unique to your institution. It’s not a one-size-fits-all thing. But a list of strong red flags is absolutely essential to the frontline, day-to-day compliance and combatting financial crime, including scams.

KYC Tip #3: Developing A Process That Monitors For EFE

As much as scam activity is getting worse in the cryptocurrency space, elder financial exploitation (EFE) is an increasing problem in every financial sector.

Your crypto business should have a separate policy for identifying, recording, and mitigating potential EFE with its own red flags and own KYC processes.

The elderly can be vulnerable to exploitation for various reasons, like cognitive decline. But even if a customer over the age of 60 appears to be of sound mind and is accompanied by someone else — someone they identify as a family member, let’s say — they could still be victims of EFE.

Only a vigorous policy for EFE can help reduce this unique kind of exploitation, both for your business and the industry at large.

Key Takeaways For Cryptocurrency Businesses

We hope these three points are helpful, but if we had to boil this post down to one takeaway, it would be this…

Yes, scam activity is a problem in the cryptocurrency industry, and there are a myriad of cryptocurrency scams people fall prey to every day. But cryptocurrency businesses/MSBs/money transmitters/other FIs are fully capable of adopting and enforcing strong compliance protocols to mitigate rampant financial crime.

The more legitimate businesses adopt good compliance, the more legitimate the cryptocurrency industry will be.

If you run a cryptocurrency business and have questions about cryptocurrency compliance, you can schedule a free consultation with BitAML.


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