Crypto exchanges have an increasingly important responsibility to ensure that services remain compliant with various government regulations. As policies begin to mandate more transparency in the cryptocurrency market, exchanges must implement procedures to perform thorough KYC checks on crypto traders.
In this article, we examine why exchanges are having to change the way in which they manage digital identities of users, and how technical solutions like SingleSource could drastically simplify the compliance process.
Crypto Exchange Compliance: from the shadows to the spotlight
When the first crypto exchanges were established, there were not many official financial and legal requirements in place to regulate trading. However, in the past few years, regulators in various governments around the globe realised the need to apply AML policies to crypto exchanges and several other new types of businesses.
Even though cryptocurrencies were originally used quite frequently for a variety of criminal activities, many coins and tokens are now increasingly viewed as ultra-transparent forms of payment. As transactions on exchanges are mostly designed to be traceable, several cryptocurrencies are already offering more transparency than fiat options.
As policies change and more users begin to adopt cryptocurrency, exchanges serve as a way to bring even greater legitimacy to the blockchain-based, P2P payment economy.
For all exchanges, there are many technical and legal factors to constantly consider. With this responsibility, we are beginning to see an emerging push for the standardisation of crypto exchange compliance around the globe.
Digital Identity and Challenges to Crypto Exchange Growth
Exchanges aren’t alone in the goal to achieve a future where financial transparency is championed. Many users are also onboard. This is because both cryptocurrency exchange operators as well as citizens have realised that there are several disadvantages to traditional identification systems.
Older identification systems (i.e. national passports) are unconnected, which means that users are limited in their ability to access financial services across geographic borders. Identities are often controlled by one government, leading to varying levels of access and economic opportunities based heavily upon one’s citizenship. For law-abiding citizens this creates many barriers to becoming a global citizen.
Cryptocurrency exchanges can promote the management of digital identities for crypto finance by developing systems that create more opportunities for citizens. However, process has to be done carefully. In most locations around the globe, cryptocurrency exchanges have an important legal responsibility to ensure that users aren’t buying and trading currencies for illegal purposes (i.e. money laundering, terrorist funding, various types of fraud).
Traditional KYC checks do add the steps necessary to make exchanges regulatory compliant, but are also difficult to implement cheaply at scale. As a result, exchanges are limited in their ability to gain new users, enter new financial markets, or gain the amount of liquidity necessary to drive mainstream adoption of digital currencies.
Blockchain-based KYC Checks for Crypto Exchanges
The movement from traditional KYC checks to blockchain-based KYC checks isn’t simply about cutting costs. It’s also about increasing efficiency and empowering continued technical innovation. Manual KYC checks aren’t able to meet the demand of popular exchanges looking to increase user growth. Moreover, even the most well-established crypto exchanges have been unable to implement effective AML strategies. For instance, in April 2018, a laundering-related class action lawsuit was filed against Coinbase.
According to a survey conducted from July 1 to September 1 2017, over 50% of KYC checks were still done manually. So why hasn’t blockchain-based KYC already become a widely-adopted solution? According to Thomson Reuters, there are a number of possible reasons. Some market solutions don’t provide a technology that aren’t technically feasible to implement. Others lack the vision necessary to properly navigate varying, complex regulatory reforms or to ensure that financial transparency doesn’t neglect user concerns over data privacy.
SingleSource Solves KYC
While other solutions in this space do face significant challenges to adoption, SingleSource provides a KYC solution that addresses the specific technical needs of crypto exchanges and their users. We understand the need to improve the efficiency of KYC and are continuously working to ensure that our blockchain technology is able to keep up-to-date with the changing regulatory climate.
By creating the foundation for a better digital identity, we are improving the viability of the entire crypto-based economy. With SingleSource, crypto exchanges can meet data privacy requirements while also increasing the financial transparency needed to empower greater user accessibility and adoption.
Check out the SingleSource whitepaper for more info on our technical specifications and potential applications for cryptocurrency exchanges as well as other businesses.