If you’ve signed up to any regulated or semi-respectable cryptocurrency exchange, you’ll have undergone KYC (Know Your Customer). As the pace at which both fintech and cryptocurrency innovation grows, so does the need for preventing money laundering and fighting financial crime. Moving around large sums of money between bank accounts will immediately trigger anti-money laundering checks. But this is not the case with crypto.
There is still no official regulation on KYC within the European Union for cryptocurrency exchanges and wallet providers. However, this will soon change with the impending AML regulations from the FATF later this year. And, according to a study by P.A.ID Strategies, as much as 68% of cryptocurrency exchanges will not be compliant by then.
“It was notable that the majority of crypto exchanges and wallets do not have proper KYC procedures in place and are not ready.”
The report also notes that there is “such variation in how companies are conducting their onboarding procedures”. This is largely due to a lack of clear guidelines that cause uncertainty, but it’s also down to cost. KYC is expensive – and it’s about a lot more than just uploading a selfie with your passport.
KYC is necessary but expensive for exchanges
Cryptocurrency exchanges have the moral and soon-to-be legal obligation in FATF member states to ensure that their customers are not engaging in any underhand dealings. This includes financing terrorism and laundering money. But the cost of compliance can be crippling for cryptocurrency companies.
Stephen Hyduchak, CEO of Bridge Protocol, a company that uses blockchain technology to help companies achieve KYC compliance, explains, “A year and a half ago we were helping companies to buy this service and it was expensive, so we said, ‘why don’t we try to use the blockchain to apply this?’”.
He claims that his company has built some of the most comprehensive and cheapest KYC solutions on the market. Bridge Protocol uses blockchain and other nascent technologies including machine learning and AI to “lower the cost”.
But isn’t blockchain technology still somewhat experimental and expensive to use? Can Bridge Protocol really manage to bring down the cost?
Stephen shakes his head vigorously. “Immensely”, he assures.
The company has created its KYC solution through the hard work of a robust team of developers pertaining to the City of Zion, and through carrying out grassroots research. Stephen went to KYC providers one by one trying to find out their costs and solutions. He says:
“Some providers for accredited investors (which is something so simple) were talking about $2-4 per person depending on the company… and a lot of the time it was a social media scoring! They weren’t even using the latest technology to certify documents. So we can come in at a dollar, still make a ton of profit and serve the community.”
But is using blockchain technology for KYC a little scary?
When you think about user data, identity, the margin for error, and the fact that anything written into the blockchain lasts forever, is using blockchain technology for our sensitive data not just a little problematic?
At this point, CTO Alex Guba jumps in to explain, “With our identity, there is a concept called a claim. This would be, ‘I’m over 18, my name is Alex’. Those are considered claims about me. So you have both identifiable information but you also have anonymous claims, like ‘I’m over the age of 18’. So you might write that blockchain address 12345 is over the age of 18. That’s not sensitive information.”
When explained that way, it doesn’t sound so frightening after all.
He continues, “The nature of the types of claims needed for trading – ‘Are you an accredited investor?’, ‘Are you a US resident?’, ‘Are you over 18?’ – these are very yes-no questions, and you need these to be able to do these things. These statements are enough for exchanges to be compliant.”
He goes on to explain that the way most exchanges are conducting KYC is unnecessary and they’re asking for information they don’t even need. A cryptocurrency exchange doesn’t need your driving license or passport, for example. “It’s really about controlling the type of information that’s written into the blockchain”, he says.
Stephen chimes in agreement. “Yeah, so it’s very vague, the things on-chain are just these basic claims, nothing from your social or passport. We don’t store that data, no one stores that data. So if we get hacked, no one can take that down to the car lot and use that information to take out a loan.”
Giving customers a portable identity
While Stephen says that the company’s natural customers are cryptocurrency exchanges for now, they have a “future-ready technology” that can be applied to all types of industries, from insurance to healthcare.
They can also provide customers with a portable identity. This means that users can take the Bridge KYC passport and present it to any company that accepts it. They wouldn’t have to carry out separate AML and KYC checks every time they want to open an account at a new exchange, or rent a car, for example.
“The good thing for us as a business”, says Stephen, “is that we’re not trying to put nodes into space. Our business is companies have to buy it, they’re spending millions on it, so our conversation is ‘we can save your million-dollar spend, I can cut that in half for you…’ There is more and more regulation, but if we can help bring the cost down for our customers, it’s a win for them and a win for us.”