How to Perform Crypto Transaction Monitoring & Why

Last Updated: August 7, 2023 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.
Crypto KYC, or Know Your Customer, is a legal requirement for centralized exchanges to verify their users’ identities. It is designed to ensure that their users do not use crypto launder money, dodge income tax, or finance illegal 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.
KYC checks are similar in crypto to the process for traditional financial institutions. The rules are set by government regulators and must be adhered to depending on the crypto exchange’s geographical location.
In concrete terms, the cryptocurrency KYC process will need to verify the user’s:
These checks can be performed manually, but are more likely to be automated via KYC software, which can offer a risk-based approach as well as identity verification tools.
Since crypto exchanges are also mandated to follow anti-money laundering regulations, it is also beneficial to combine KYC and AML checks, which include PEP checks, sanction checks, and adverse media checks.
Note that some crypto exchanges are also required to monitor users on an ongoing basis, for instance by using transaction monitoring.
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:
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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Cypto exchanges rarely perform KYC checks manually, which is why their KYC software should offer the following tools and features:
A new generation of identity verification software vendors makes it easy to integrate document verification for your KYC crypto checks.
However, it should be noted that these tools adds a ton of friction to the customer journey. There is also the issue of falsification, as fraudsters can photoshop IDs or even upload stolen IDs.
Last but not least, these checks are expensive. Each automated document check is estimated to cost $2 on average.
Digital footprint analysis can be either used as a pre-KYC check or as an additional layer of security for your crypto KYC process.It 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.
Armed with all the information above, we can now get a better picture of who we’re dealing with, especially as the data is fed through risk rules, which help calculate how risky the user is during the crypto KYC stage.
Crypto users’ devices contain hundreds of datapoints that can be used to profile them at the KYC stage. Their combination of software and hardware is likely to be unique, which can become a key identifier – especially if you’re trying to find connections between accounts.
The same technology is also helpful in weeding out bad agents who obviously rely on emulators and virtual machines to access your crypto exchange. Since these are considered high risk, you should not even proceed with a full KYC check.
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.
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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.
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.
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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