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Knowing your ‘true cryptocurrency’ customers

Small to large investors, and trading platforms as well, are well aware of the potential of cryptocurrency. For the uninitiated, cryptocurrency is a digital or say, virtual currency, which uses cryptography to secure transactions. At the core of it is a decentralised network of point of contacts called blockchain. Cryptocurrencies can make fund transfers easier, eliminating the need for a third party, such as a bank or a credit card company. Such transfers can be instead be secured with digital keys, say Arun Rishi Kapoor and Anand Chandrashaker of Infosys BPM.

However, there are disadvantages and risks involved in the use of cryptocurrencies. For one, cryptocurrencies are not immune to frauds and scams. Using cryptocurrencies, transactions can be near-anonymous, which makes it well-suited for a host of illegal activities. On the top of the list is money laundering.

According to the Wall Street Journal, scams worth $4 billion (€3 billion) related to cryptocurrency were discovered in 2019. Fraudsters, tax evaders, and money launderers who intend to conceal an illegal money trail, often provide fake information, fake identities, create multiple accounts, and use stolen credit cards to deposit funds in these accounts. They buy cryptocurrency using these funds and distribute it amongst other of their wallets, which are often stationed overseas, even before legitimate customer realises the fraud on a stolen card and raises an alarm.

The cryptocurrency trading platforms are highly targeted by fraudsters. One of the biggest reasons is its KYC (Know Your Customer) process, which is quick, but not mature enough to handle emerging frauds. While many people have lost their money in the social engineering attacks, trading platforms too have had to endure identity and transaction fraud.

Different countries have different ways of recording demographic information. Each government faces its own challenge of in keeping these records safe, and smoothen the existent vulnerabilities in processes and function. Now that cryptocurrency trading companies are going global, it becomes crucial for them to be aware of the national identity system of a particular country and the loopholes that exist therein.

There are umpteen number of identity checks performed by a cryptocurrency company. Before verifying a crypto account, platforms typically ask for all relevant data upfront, which are subjected to identity/KYU checks. Once all relevant details are collected and checked as part of ‘submission check’, only then the KYC process is initiated. Identity check ensures that an applicant’s name, address, and date of birth match the government records. A few countries, like the UK, add an extra layer of security. The country validates a person’s address by sending them a post with a unique verification code. Which is then to be fed online to confirm the identity.

The watchlistcheck runs the gathered information through the global criminals lists, such as anti-money laundering list, most-wanted lists, disqualification lists, politically exposed or anti-terrorism list, and so on. The credit report check is done to identify any financial irregularities, or bankruptcies.

The right to work report identifies whether an applicant has the appropriate rights and approvals to work in the country of residence. Another, not so vastly used security check is to validate whether an applicant information is available on the mortality register, which records the death certificates. A few countries also maintain centralised records of eviction history, driving history, sex offence, and abuse of illegal substances, if any.

Even after such stringent checks and balances, why do cryptocurrencies still fall prey to fraudsters? In fact, such frauds are only increasing. A widely accepted theory blames the existing loopholes in the country policies surrounding record-keeping, sharing or distribution. For example, a person found in possession of illegal drugs can easily go scot free pleading mental health issues; or a near-bankrupt individual could buy a high credit score to obtain a loan.

There are companies that increase your credit score by adding you as an authorised user of someone else’s account, often a person with a high credit score. Similarly, fraudsters can easily bribe officials and obtain fake IDs to create ghost accounts for illegal transactions.

To make cryptocurrencies successful as a trusted medium for secure transactions, the system within which it will operate, will also have to become transparent. Unless the collected data is accurate at the source, even the most fool-proof KYC process will fall flat. Till these loopholes are plugged, it is important for the traders and investors to be aware of them, in order to apply appropriate checks, such that only accurate and relevant data is processed.

This article was originally published by Evolving Enterprise.

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