The crypto market is forecast to reach nearly $2 billion by 2027, which further directs attention to the digital exchanges powering this growth. Cryptocurrency exchanges enable users to buy and sell digital tokens with fiat currency, withdraw money by converting tokens back into fiat, and trade and transfer crypto coins. These platforms are often not subject to clear, strict customer verification and anti-financial crime regulatory requirements. A global study found that 56% of 800 global virtual assets service providers (VASPs) had weak or “porous” know your customer (KYC) procedures. Some of these enabled onboarding and permitted unlimited deposits and withdrawals for users who provided no personal details beyond addresses, email addresses, and names. And as buyers rush to the bitcoin market so do the fraudsters: The number of fraudulent orders placed on crypto exchanges increased more than 46% in 2020.
Not all customers are comfortable with minimal procedures
Not all regulators or customers are comfortable with platforms that rely on minimal KYC. Fraudsters can take advantage of loosely guarded ecosystems to scam users, launder money and facilitate other crimes. Therefore, crypto exchanges need to carefully consider how they can work to block fraudsters from their platforms and keep legitimate customers safe while maintaining a convenient and compelling user experience. To do that, crypto exchanges need to tailor KYC approaches that meet users’ needs for smooth onboarding experiences while serving their demands for secure, trustworthy transaction environments.
Balancing ID verification speed and rigor Crypto exchanges
The infrastructure providers that support crypto exchanges need to be certain they can accurately detect and thwart fraudsters who attempt to onboard and abuse the systems. These companies simultaneously need to ensure that onboarding remains swift and seamless, however, because honest customers want to be able to get up and running quickly to take advantage of trading services before crypto prices change.
Helping crypto platforms preserve convenient experiences while flushing out bad actors
Fraudsters may be eager to exploit VASPs that use only light KYC measures — a problem that could impact the 44% of U.S.-based exchanges that permitted unlimited withdrawals and deposits to users who provided no more identifying details than names and email addresses in 2020. Therefore, security-minded platforms need to decide how best to defend against such potential misuse while still delivering compelling customer experiences. This problem is increased due to cryptocurrency users’ sensitivity to their anonymity and desire to trade quickly and take advantage of current market prices. The volatile nature of many digital assets means the currencies’ market values could fluctuate instantly, and users may be reluctant to spend much time undergoing intensive KYC procedures before trading.
While seeking to flush out bad actors and preserve convenient customer experience, crypto exchanges should adopt low-friction user verification processes. Crypto exchanges can utilize these four following tips to efficiently guard against fraudsters while ensuring a smooth user experience:
1. Automate the onboarding. Not so long ago, identities were verified by a human expert who authenticated them manually during a back-office “review.” With online traffic and digital transactions surging, and cryptocurrency exchanges racing to scale verification and fraud prevention for as many as 1 million new customers a day, this is no longer possible. Deep learning is now being used to verify and authenticate ID documents with minimal human intervention. This saves companies — and their customers — an enormous amount of time, decreases business operating costs, and ensures that customers enjoy a frictionless onboarding experience and know-your-customer (KYC) initiation with high accuracy.
2. Be prepared to complete ID verification within seconds to prevent customer churn. When it comes to onboarding, speed is everything. To get your users to execute their first trade as quickly and easily as possible, rather than losing them during time-consuming KYC and ID authentication processes, you and your users want ID verification technology that enables decisions in 4 to 8 seconds—rather than minutes, hours, or days. A good frontend system that alerts the users of possible problems in the quality of their uploaded documents can decrease future frustrations stemming from hick-ups in the onboarding process. Use systems that can give the user feedback in real-time, thus minimizing possible obstacles and accelerating the overall onboarding process.
3. Don’t sleep on fraud prevention or KYC compliance. Identity theft risks are on the rise worldwide. And the elusive nature of cryptocurrency makes digital currency exchanges particularly vulnerable to identity theft. Crypto exchanges must protect themselves and their customers from fraud, especially during the digital onboarding process. Fraud prevention is not a one-and-done protective mechanism you put into place and then forget. Rather, identify a technology solution that will automatically adapt to keep you updated with evolving global regulations and consumer expectations. Some solutions even use aggregated data pooled from numerous sources to enable a unified front against ID fraudsters.
4. Ensure integration is seamless. When comparing the identity verification solutions available to them, crypto exchanges should look for the one with the fewest integration requirements. They are concerned about downtime and complications when switching to (or starting with) a new provider. The best solution will seamlessly integrate with your enterprise IT stack through a single API or an SDK for immersive integration with your software and procedures.
The writer is Vice President of Customer Success at AU10TIX