Business Verification (KYB) in the Crypto Industry

No matter how you look at it, cryptocurrency is hot right now. As of August 2021, there are almost 6,000 different cryptocurrencies worldwide, a number that has nearly doubled in the last few years. Since June of 2020, there have been over a million Ethereum transactions per day, every day. Overall, consumer acceptance continues to rise. Worldwide, an estimated 18,000 companies accept crypto payments with over 300 million crypto owners. To support demand, more crypto exchanges continue to appear around the world. The largest crypto exchange, Binance, conducted over $29 billion in transactions in one day in September of 2021.

The Pressures of Onboarding

All this growing interest in crypto is not without its issues. The rapid influx of new crypto purchasers has put a severe strain on some exchanges. Some larger exchanges, especially during hot market times, are forced to suspend registering new users to catch up from a burst of demand. Eventually, some are able to scale, and smaller exchanges pick up some of the load. Still, there is a problem. Onboarding still takes too long.

Contrary to popular belief, crypto is not just for private individuals. Businesses are increasingly entering the crypto market to facilitate payments from customers as well as business-to-business (B2B) transactions. Organizations can create business accounts on major platforms, including Binance. Unfortunately, the process is even more burdensome for opening businesses accounts. Exchanges require an extensive list of documentation that must be uploaded and reviewed. Documentation includes certificates of incorporation, articles of association, bylaws, a list of shareholders and managers, extracts from corporate registries, completed questionaries, and personal IDs for partners, owners, and dealers. Once uploaded, businesses need to wait weeks or even months for approval. By the time your business account gets verified the hot market train can be long gone.

The pressures of onboarding new businesses in the crypto space are bound up in the balance of the need to get a large number of customers started as quickly as possible, with the importance of adequately vetting organizations to avoid fraud, money laundering, or any other criminal activity. Many businesses realize that if they can’t limit illegal activity through a thorough onboarding program, regulators may step in. And, in many cases, they already have.

AML in the Cryptocurrency Industry

Money laundering is not a new problem. However, cheap, fast, and anonymous transactions make crypto a perfect vehicle for cleaning money. As a convenient payment tool for criminals, cryptocurrency has attracted both individuals and companies interested in money laundering and terrorism financing. Thus, a common money laundering model has emerged that consists of 5 steps:

  1. Collection of dirty money
  2. Purchase of bitcoin
  3. Sale of bitcoin
  4. Purchase of other cryptocurrency
  5. Purchase of luxury assets or investing

Regulatory agencies are keenly aware of the overwhelming interest of money launderers in crypto. Laws like the Anti-Money Laundering Act of 2020 in the United States have given regulators enhanced authority over cryptocurrency exchanges that fail to follow the rules, such as verifying the identity of customers making transactions greater than $10,000 and maintaining records and filing reports on these transactions. The European Union (EU) has had numerous interactions of anti-money laundering regulations, with the 6th Anti-Money Laundering Directive (6AMLD) being the latest update made in 2020. The Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, has also developed international standards that include regulations for crypto.

Why Staying AML Compliant is Critical in Crypto

These updated regulations have led to the development of two processes tied to identifying individuals and businesses in the crypto business. Know Your Customer (KYC) refers to the process of confirming a private person’s identity in a way that complies with the regulations. When the customer is not an individual but a business, Know Your Business (KYB) processes verify the identity of the business as a whole. KYB, also known as business verification, reviews the structure and background of a legal entity to ensure that the company is who it claims to be.

Regulations aside, KYB processes are a way to keep your company, assets, and reputation intact. Knowing your customers, whether they be individuals or businesses, can protect you from fraud, especially in the world of crypto. More importantly, robust KYB can reduce the risk of a company unwittingly becoming part of money laundering or other illegal activities. Either way, not attending to KYB can expose a company to financial loss, negative reputational impact, and even legal consequences.

On the regulation side, companies working with crypto cannot afford to ignore these updated rules as the consequences of violations can be harsh. With the rise of online fraud during the COVID-19 pandemic, there has been an increase in compliance monitoring. Failure to have sufficient KYC, KYB, and AML processes has led to many businesses losing their crypto licenses. Violations can also carry fines and even prison time. While the harshest punishments are reserved for those knowingly involved in money laundering activity, companies that fail to implement robust KYB procedures to remain AML compliant put themselves at serious risk.

Still, organizations in the crypto industry need to balance the need to have KYB processes in place to reduce liability and ensure regulatory compliance with the need to quickly onboard new businesses. Traditional manual approaches are far too time-consuming, often taking weeks or even months. In addition, these processes can tie up valuable staff time and may still not be sufficient to catch every problem and avoid fraud or AML violations. Thankfully, new solutions using the power of AI can make this verification process faster, easier, and more effective than manual approaches. One of these solutions is Vespia.

KYB and AML Compliance for Crypto Should Be Automatic

With everything at stake, those in the crypto business cannot afford to get stuck with outdated, inefficient onboarding procedures. There are too many potential gaps that could lead to legal, financial, and regulatory problems. A manual approach also continues to take far too long for crypto exchanges. This can lead to lost business and delayed projects. Just consider the situation with crypto exchange Binance. When a company is ready to make a move with crypto, they don’t usually have days or weeks to wait before getting started.

Even worse, the risk of lengthy delays leads to a great temptation to take shortcuts or overlook critical details. That leads to even more legal and financial exposure. Businesses working with crypto need automated solutions to ensure that adequate KYB protocols are followed every time, with little need for human input. This is why we have decided on a new way of doing KYB in the crypto business:

  • User-> Upload a long list of documents needed for verification-> wait for 4 weeks or more-> start using your crypto account
  • Crypto business-> Manually review a long list of documents-> request and wait for information from official databases-> confirm the new crypto account
  • Our vision-> User enters their company name, registration code, and country-> our solution verifies the business in 30 seconds or less-> crypto business confirms the new crypto account with one click

Money laundering is a serious problem, especially in the relatively new cryptocurrency market. Unfortunately, because of the nature of the activity, accurate statistics are hard to come by. However, it is believed that money laundering worldwide involves as much as 1.5 trillion dollars per year. With this massive amount of laundered money, much of it running through crypto exchanges, companies cannot afford to ignore it.

Fortunately, thanks to the latest technology, companies can attend to their KYB needs quickly and easily and stay in compliance with the latest AML regulations. This will lead to faster onboarding and less risk of regulatory problems or potential exposure to fraud and other illegal activities.

We at Vespia want to be part of this change and introduce a new standard for business verification.

If you would like to become an early adopter of Vespia, please request a test account here (or contact Julia or Mike directly).

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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