Memo to crypto exchanges: KYC compliance can be a competitive advantage

Crypto intelligence firm CipherTrace released a study on Oct. 1 reporting that more than half of the world's cryptocurrency exchanges had deficient customer identification processes in place against money laundering.

"Even Binance, one of the biggest and most famous crypto exchanges used not to require KYC for withdrawals below 2 Bitcoin. Many crypto-to-crypto exchanges, even those with high trading volume, like Huobi and HitBTC, do not require users to submit to any identity verification processes."Some lag behind".

KYC rules are often linked with Anti-Money Laundering regulations, but AML is broader and can include, in addition to a KYC process, steps like risk assessment, compliance training, ongoing monitoring and internal audits.

Given that regulators in the U.S. and Europe may be zeroing in on crypto exchanges, what should VASPs be doing to boost KYC and AML compliance? Pawel Kuskowski, CEO of blockchain analytics platform Coinfirm, told Cointelegraph, "Source of funds and crypto transactions monitoring are critical.

In Chainalysis' 2020 Crypto Crime Report, the firm suggested that crypto exchanges need to extend KYC scrutiny for over-the-counter trade desks - which, while attached to exchanges, often act independently.

Jesse Spiro, global head of policy at Chainalysis, told Cointelegraph that crypto exchanges should be looking at implementing a range of tools: "Outside of travel rule compliance, exchanges need to implement fraud and AML systems more broadly.

In March 2019, Coinfirm examined 216 cryptocurrency exchanges and found 69% of them lacking "complete and transparent" KYC procedures.

" Gemini was one of the first crypto exchanges to conduct KYC before allowing anyone to use its platform.

Cointelegraph asked Hughes if the existence of so many noncompliant crypto exchanges, as identified in the CipherTrace study, put Gemini at a competitive disadvantage.

In sum, more regulation of VASPs is coming, and it will probably be more costly for crypto exchanges to comply with KYC and AML rules, but compliance in the longer term also offers benefits like the ability to attract more conservative investors.