Two Thirds of US, EU Crypto Exchanges Fail to Verify Customer Identities

Analyst P.A.ID Strategies has revealed the results of research into the on-boarding practices of cryptocurrency wallets and exchanges across the U.S. and Europe, research that focused on which of these crypto service providers are using Know Your Customer (KYC) checks when on-boarding customers. These companies might have to change their protocols when the EU’s anti money laundering regulations come into effect next year. 

Out of the 25 services included in the study — picked based on the volume of transactions — the identification protocols of 14 exchanges, including Kraken, Coinbase, Gemini, and Poloniex, and 11 wallets, including Luno, Bonpay, and Mercatox, were examined.

The research, commissioned by Mitek, a digital identity verification firm, shows that of the 25 wallets and cryptocurrency exchanges examined, 68% are allowing users to trade crypto and fiat currency with no official identification or KYC checks — with most requiring just an email address and a telephone number.

These lax requirements might be set to change. When the The EU’s fifth anti money laundering directive, AMLD5, comes into effect in 2019, it will seek to bring these currently non-compliant platforms in line with other financial service providers like traditional banks, making it law that checks are carried out on new customers to confirm their identities. John Devlin, principal analyst at P.A.ID, said of the issue:

“Cryptocurrency wallets and exchanges want to enjoy the same trust as the wider traditional financial services, but for this to happen they need to rise above the sometimes-dubious reputation of cryptocurrencies’ past and be seen as ‘model citizens’ of the economy.”

Currently, in order to sign up to exchanges and wallets that do not perform KYC, customers only need a verified email address and mobile number. Both of these are attainable without ID —  and in many countries an easily purchased pay-as-you-go mobile phone is sufficient.

With these simple tools, users of the exchanges that presently fail to meet the upcoming AMLD5 regulation can buy and sell cryptocurrencies and exchange them for fiat currencies with no questions asked.

“Wallets and exchanges want to change perceptions of lawlessness and it’s a relatively straightforward fix. Identity verification processes can be—if implemented correctly—simple for the customer and no barrier to signing up,” said Kalle Marsal, COO at Mitek. “By incorporating systems that are just as future-looking as cryptocurrency itself, exchanges and wallets can be both competitive and compliant with regulatory demands.”

If a cryptocurrency platform is found to be involved (implicitly or not) with money laundering after failing to meet the demands of the upcoming regulation, it’s likely to cause irreparable damage to the company’s brand.

As we know, this is a delicate subject. The key is to find the right balance between protecting our rights to chose what information we share (or don’t) about ourselves, while at the same time helping take the right steps to further legitimatize the crypto industry. 

“Meeting the regulatory demands ahead of AMLD5 coming into force could go a long way to changing this sector’s reputation as being something of a ‘wild west’,” Devlin said.

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