Are High-Security Checks Worth It?

by Bence Jendruszak
Cryptocurrency exchanges are magnets for fraudsters – and regulators.
Let’s learn how to beat the former and appease the latter with better crypto KYC and identity verification tools.
KYC, or Know Your Customer, refers to the legal requirement for certain types of businesses to verify their users’ identities. It is designed to reduce AML fraud and many other illicit activities.
With their inherent relationship with money and pseudonymous digital assets, crypto exchanges are particularly targeted by fraudsters and criminals, which is why governments have imposed growing KYC and identity verification regulations in recent years.
However, KYC is still seen as an unwelcome obstacle by crypto exchanges and crypto enthusiasts. A 2019 report by the regtech Coinfirm claimed that 69% of crypto businesses did not have “complete and transparent” KYC procedures.
IDV verification in cryptocurrency is the process by which crypto exchanges check the official ID documents and proof of address of new customers in order to be certain that these individuals are who they say they are. IDV is one of the main KYC requirements in cryptocurrency.
This can involve asking them to upload scans of their passports or driver’s licenses, for example, or to join a video chat with an agent who will ask them to speak their name and show these documents to the camera.
Even with the best of intentions, crypto exchanges face an uphill battle when it comes to KYC.
Here are four reasons why:
It’s not just crypto exchanges that are under growing scrutiny from regulators either, but many more crypto-related companies. In 2020, for instance, a crypto tumbler was fined $60M for failing to meet AML requirements.
A reward offered by a crypto exchange for completing the KYC process.
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Using some type of KYC step at onboarding is very beneficial for crypto exchanges and platforms, for several reasons. Let’s take a closer look:
In concrete terms, the cryptocurrency KYC process will take on the form of identity verification (IDV). You will usually check for:
How you perform these checks will depend on your KYC software capabilities. Then, there are internal risk management processes, such as:
You can read more in our more general AML checklist here.
Whether the KYC and identity verification tools are integrated from third-party software or deployed locally, crypto exchanges will tend to use four types of checks:
Anyone who’s had to open an important online account lately will be familiar with video verification. It’s quickly becoming the norm for a number of financial services and products and is increasingly popular with crypto exchanges.
The pros?
A new generation of identity verification software vendors makes it easy to integrate this kind of software into your platform as part of the onboarding process.
Unfortunately, there are a number of downsides, too.
Firstly, it adds a ton of friction to the customer journey. Not only does the user have to locate a relevant ID document, but they also have to submit the image or video according to strict algorithmic requirements, which often takes multiple tries and significant time commitment (light level, no flare, right angle…).
Then there is the issue of falsification. It is becoming increasingly affordable to create a deepfake video. Photoshopping ID services is so prevalent that a quick Google search will point you in the direction of dozens of websites.
Last but not least, these checks are expensive. Each automated document check is estimated to cost $2 on average.
An alternative comes from digital footprint analysis.
Digital footprint analysis allows companies to learn more about users based on hidden digital and social signals. It works by gathering data around things like an email address, IP address, phone number, or the kind of browser and device used to connect to a site.
This is much harder for fraudsters to falsify, and such efforts bring little RoI.
The fact is, legitimate consumers are much more likely to have a digital footprint than criminals.
This can make all the difference when you’re separating the wheat from the chaff and looking to stop bad actors from reaching the full KYC/IDV stage.
Here’s the thing with digital footprint analysis: It won’t replace a KYC check. But there are multiple reasons why crypto exchanges such as Xcoins rely on it on a daily basis – and not just for identity verification:
Let’s look at an example below, using three types of data enrichment.
By running an IP data enrichment check, we found that the user is connecting via a datacenter proxy, which increased our risk score.
An email check lets us know that the user has a few social media accounts, but not a heavy online presence.
Based on the email address only, we can see that the user has an online presence.
Even if they are not registered on many social sites, the footprint appears consistent with what we’d expect, with registered accounts on Twitter, Instagram, Facebook, etc.
The credit card BIN lookup, however, highlights some potentially troubling information.
Why is it registered in the US when the IP points to Australia? And why did the CVV not work?
Armed with all the information above, we can now get a better picture of who we’re dealing with. This is what we call digital footprint analysis.
And, in this case, you should have reasonable doubts at this stage, and possibly conclude that the user should not go through with a KYC check on your crypto exchange – as it would be a waste of a KYC check or also potentially result in onboarding a fraudster.
Or. at the very least, you should be extra vigilant about the ID details they will give you in the next stages…
Of course, crypto exchanges don’t need to integrate automated KYC software. They can also verify IDs manually against databases.
Unfortunately, there are few advantages to the method, except maybe if you only verify a very low volume of IDs. The accuracy rate doesn’t improve, it’s not scalable, and the pressure on your manual review team will only get worse with time.
Finally, a fairly new proposition in the world of ID verification is using the power of blockchain technology. There are certainly a number of advantages – in theory at least. Since blockchain tech is at the core of the Web 3.0 ecosystem, it might be an attractive solution for crypto enthusiasts who value their anonymity.
Blockchain IDs have also been shown to deliver excellent results in terms of affordability and efficiency. A study by Finextra, for instance, revealed that HSBC experimented with KYC blockchain successfully in the UAE in 2021.
Blockchain KYC is still new, though – which is one of its major drawbacks. Until the technology is adopted by the masses, you may struggle to find one good service that has enough ID data to validate users from around the world.
And, no matter whether this method works, authorities need to explicitly allow this type of KYC in your locale for you to use it to fulfill your legal obligations.
SEON has proven results with crypto exchanges in helping KYC checks and reducing chargebacks due to bad credit card purchases. But when it comes to ID verification, here’s why it works:
And that’s before we even mention the flexible 30-day SEON trial and cancel-anytime contracts, designed to let you fight ID fraud however you see fit.
You can give this a try below. Just enter someone’s email address or phone number and you’ll discover their digital footprint and how much it can tell us about whether they are a legitimate customer.
If you would like to find out more about how SEON can streamline your crypto KYC efforts, book a demo today.
SEON offers a complete set of fraud fighting tools that grow with your business
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Crypto exchanges have to verify IDs and perform KYC checks as a legal requirement. They face hefty fines from authorities if they don’t, regardless of where they are based.
Yes, you can buy crypto without KYC checks by using peer-to-peer marketplaces. Automated market makers (AMMs) also let you exchange crypto without identity verification. So-called bitcoin ATMs also let you buy multiple cryptocurrencies with cash (for a higher fee).
KYC checks, or Know Your Customer, are identity verification steps that finance-related businesses must make in order to avoid government fines. Crypto exchanges are under heavy scrutiny due to the fact that they tend to attract fraudsters, criminals and money laundering.
No, crypto wallets do not need to conduct KYC on their customers. However, crypto exchanges who also provide wallets will need to do KYC, unless they keep the two products entirely separate. What’s more, certain wallet operators may choose to do KYC proactively. As a consumer, you can choose to use a crypto wallet that does not require KYC compliance, or one that does.
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Bence Jendruszák is the Chief Operating Officer and co-founder of SEON. Thanks to his leadership, the company received the biggest Series A in Hungarian history in 2021. Bence is passionate about cybersecurity and its overlap with business success. You can find him leading webinars with industry leaders on topics such as iGaming fraud, identity proofing or machine learning (when he’s not brewing questionable coffee for his colleagues).
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