Buying Crypto without KYC Check? An immense risk for both users and platform operators

While the ethos of cryptocurrency was partly driven by anonymity at its inception (see Bitcoin White Paper), mass adoption and subsequent fraudulent activities such as money laundering and terrorism financing conducted by both individuals and institutional investors forced legislators to fill the regulation void in cryptocurrency. Thus, cryptocurrency had to adapt to KYC regulations and implement such policies in order to screen properly their users. 

Binance and Coinbase, both leaders in crypto trading worldwide, now enforce strong KYC policies, in order to comply with main AML and KYC regulations. While registering in one of those platforms, a law-abiding cryptocurrency user is likely to provide a government-issued ID, comply to a photo identification through a selfie, as well as provide additional personal data.  

However, some people are looking to beat KYC requirements for multiple reasons: 

• Some users believe that identity verification goes against the ethos of cryptocurrency; 

• Other individuals may want to avoid sanctions, embargo, PEP or SDN lists screenings; 

• Illicit organizations looking to access crypto exchanges to launder money

• Other users may just want to evade tax; 

• Finally, some of them are simply underage looking to trade cryptocurrencies although not legally allowed. 

For the different reasons mentioned, some users may appeal to dubious methods in order to avoid KYC checks

User behavior to bypass KYC checks and identity verification may not only have serious consequences for crypto users, but rather also cause serious (regulatory) difficulties for crypto platform operators. 

A strong regulatory risk in case of failing KYC procedures 

While KYC processes prevent most users from signing in without proper screening, these restrictions created a business opportunity on black markets. Indeed, marketplaces on different dark webs (Tor network primarily) now offer vetted accounts on crypto exchanges and other payments services for a small amount of money.  

For prices ranging from US $150 to $500, you can now buy an approved account on peer-to-peer trading platforms, professional crypto exchanges, or mainstream payment services. Those accounts are either provided with a fake name, address, and identification documents, or with genuine data obtained by any means. 

In an investigation from the specialized news outlet CoinDesk, sample accounts were purchased between US $170 and $250 and reviewed by a reporter. The accounts were on the exchanges Binance US, Coinbase Pro or Kraken, and payment services Cash App and Wirex. The analysis showed that most of them belonged to genuine United States and European Union citizens, and came along with instructions for VPN networks usage; however, it was also found that the credentials for email addresses were linked to the exchange account and Google Voice numbers. The latter appears to be a tool for fraudsters aiming to create fake accounts. 

They even adopted specific behavioral patterns, matching the geolocation of a victim, respecting transactions amounts, etc. Therefore, it is likely that a certain number of users are able to access crypto wallets on exchanges by using other individual’s accounts, thus evading KYC checks themselves. It must be taken into account that crypto exchange accounts are just a subset of the global black ID market. As reported by the cyber consultancy firm Digital Shadows, more than 15 billion of credentials would be for sale online, giving many opportunities for fraudsters to leverage data for illicit purposes. 

Such activities may represent a major risk for cryptocurrency platforms and service providers, as regulators such as the U.S. Office of Foreign Assets Control (OFAC), already fined cryptocurrency exchanges like BitGo for apparent violations of multiple U.S. sanctions programs. Indeed, the platform had allowed – even though not knowingly – individuals from Syria, Iran, Sudan, Cuba and probably North Korea, to access and use its trading services.  

Another platform exchange, BitPay, was forced to pay US $507,375 to settle its liability in a similar case. Finally, the crypto giant Coinbase may also face an investigation by OFAC, after having voluntarily disclosed alleged violations, in order to avoid major fines and sanctions. 

Finally, users who prefer to stay anonymous have other options such as peer-to-peer crypto marketplaces or Bitcoin ATMs, and do not always have to evade KYC checks. Indeed, peer-to-peer platforms enable transactions between private actors without having to disclose its identity. Thus, users would avoid to put themselves at risk, as their black market acquired account could be flagged by a platform as not genuine, consequently jeopardizing their assets. 

KYC as a support for crypto market development 

Although platforms are aware of black markets trading of verified accounts, it is possible to mitigate those risks by leveraging robust KYC processes. However, it must remain as simple as in any other financial services. In conjunction with threat intel teams deployed within major cryptocurrency companies, the robustness of KYC processes must be analyzed and put to the test. 

Although crypto enthusiasts might see KYC processes as a diminishing factor for adoption, Binance’s CEO Changpeng Zhao, known as “CZ”, declared to Bloomberg that implementing such rules had only little impact on his business. In fact, CZ declared that only three percent of its customers were lost after improving its KYC robustness: “we have chosen to go with full compliance, full mandatory KYC for global users, for every feature. We feel that being compliant will allow more users to use us. Most people do feel more comfortable using a licensed exchange. Most people – 97% of users – go through KYC. We lose only three percent of users.” 

By using a layered approach and combining different identification methods, KYC processes can be drastically improved. While a simple selfie is not cutting it anymore to keep fraudsters at bay, other means such as video identification, in addition to collecting official documents, may provide a more solid KYC approach for crypto actors.  

Straightforward and rapid, this procedure must also be painless for the user, crafted in a user-friendly environment, to keep the onboarding experience intact. Automated systems with fast response time, powered by artificial intelligence and combined with screening mechanisms and geolocation checks, provide an unparalleled solution to mitigate risks brought by fraudsters trying to circumvent KYC processes.  

Respecting these conventions will allow exchanges to participate in the democratization of cryptocurrencies and mass adoption by non-initiated, along with deterring fraudsters. 

Cryptocurrency platforms must be aware of the risk of poor KYC mechanisms 

KYC processes in the crypto community are still fighting their way in, as adoption increases. Although it is possible to buy crypto without submitting to a KYC check, it is more complicated and a risky thing to do, conversely to using an exchange complying to KYC requirements. Regulations aside, KYC processes allow user confidence to grow, whether it is in the market, or in crypto exchanges.  

In an onboarding process, KYC can be transparent and painless without harming conversion rates, as many other fintechs and crypto exchanges have already proven. 

Crypto actors evolving on the European market now have to comply with the European Union’s Fifth Anti-Money Laundering Directive (AMLD5). For this reason, it may be the best time for these platforms to re-think and enhance KYC and AML procedures (see our Crypto KYC Page), which will ultimately bring a benefit to both the users and the platform itself. 

Crypto in KYC—the new pot of gold at the end of the regulation rainbow?

Learn what exactly are the new crypto industry trends everyone is talking about and the regulations that are following.
Get your free copy now
Crypto_EN_v2.0

By

Buying Crypto without KYC Check? An immense risk for both users and platform operators 1

Francisco Martins
Senior Identity Consultant, Financial Sector UK/I at IDnow
Connect with Francisco on LinkedIn

Play