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Cryptocurrency is still on fire in 2023. As of April 2023, there were more than 11,000 different cryptocurrencies worldwide, showing significant growth in just two years. Since June 2020, Ethereum has seen over a million daily transactions, with no signs of slowing down. With increasing consumer adoption, over 25,000 companies accept cryptocurrency payments worldwide, and there are over 500 million crypto owners globally. The demand for crypto has also led to the emergence of new exchanges, with Binance remaining the largest, conducting over $35 billion in transactions in a single day in April 2023.
The Challenges of Client Onboarding in Today’s Business Landscape
The surge in interest in cryptocurrency is not without its challenges. The massive influx of new crypto buyers has created significant pressure on exchanges. During high market periods, several larger exchanges have had to pause new user registrations to catch up with demand. While some exchanges manage to scale up eventually, smaller ones have to pick up some of the slack. However, the problem of slow onboarding persists.
Contrary to popular belief, the crypto market is not only for individuals. Companies are also increasingly entering the crypto industry to enable customer payments and business-to-business transactions. Major players, such as Binance, allow businesses to create accounts. However, the process of opening a business account is even more arduous, requiring a comprehensive set of documents to be uploaded and verified, such as certificates of incorporation, articles of association, bylaws, a list of shareholders and managers, extracts from corporate registries, completed questionnaires, and personal identification for partners, owners, and dealers. Businesses may have to wait weeks or even months for verification, causing them to miss out on potential opportunities in the hot market.
The pressures of onboarding new businesses in the crypto industry are linked to getting as many customers onboarded as soon as possible while thoroughly vetting organizations to prevent fraud, money laundering, or other criminal activities. Many businesses realize that if they don’t adequately limit illegal activity through rigorous onboarding processes, regulators may intervene. In many instances, they already have.
AML in the Cryptocurrency Industry
Money laundering is a persistent issue, but the rise of cryptocurrency has made it even more challenging to combat. Cryptocurrency transactions are cheap, fast and provide anonymity, making them attractive to those seeking to launder money.
Criminals, individuals, and organizations have turned to crypto as a payment method for illicit activities such as money laundering and terrorism financing. This has led to the development of a five-step money laundering model that is commonly used, which is illustrated in the image below.
The standard cryptocurrency money laundering model.
Regulatory agencies continue to closely monitor the interest of money launderers in crypto, as the industry grows. In the United States, the Anti-Money Laundering Act of 2020 has granted regulators increased authority over cryptocurrency exchanges that fail to comply with regulations, such as verifying the identity of customers conducting transactions exceeding $10,000 and maintaining records and submitting reports on such transactions. The European Union (EU) has implemented several anti-money laundering regulations, the latest being the 6th Anti-Money Laundering Directive (6AMLD), updated in 2022. The Financial Action Task Force (FATF), a global watchdog for money laundering and terrorist financing, has also established international standards that include guidelines for crypto.
The Importance of AML Compliance in the Crypto Industry
The updated regulations in the crypto industry have given rise to two processes for identifying individuals and businesses involved in crypto. Know Your Customer (KYC) is used to confirm the identity of individuals in compliance with regulations. In contrast, Know Your Business (KYB) processes verify the identity of a business as a whole. Robust KYB processes are crucial for protecting a company’s assets, reputation and reducing the risk of unwittingly participating in illegal activities such as money laundering. Ignoring KYB can result in financial loss, negative reputational impact, and even legal consequences.
In light of the increased compliance monitoring and the rise of online fraud during the COVID-19 pandemic, companies working with crypto must adhere to the updated rules. Failure to implement sufficient KYC, KYB, and AML processes can result in losing crypto licenses, fines, and prison time.
Therefore, balancing the need for KYB processes to reduce liability and ensure regulatory compliance with the need to onboard new businesses quickly is essential. Manual approaches are often time-consuming and may not catch every problem or avoid fraud or AML violations. Fortunately, AI-powered solutions such as Vespia can streamline the verification process, making it faster, easier, and more effective.
Automating KYB and AML Compliance for Crypto
In the crypto industry, outdated and inefficient onboarding procedures can result in legal, financial, and regulatory issues that businesses cannot afford to face. Manual approaches take too long, causing delays and lost opportunities, as seen in the case of Binance. The pressure of these delays can tempt businesses to overlook critical details and take shortcuts, exposing them to even more risk.
To avoid these risks, automated solutions are necessary to ensure efficient and compliant KYB processes. Vespia has recognized this need and has developed a new way of conducting KYB in the crypto industry.
A Comparison of Vespia’s Crypto User Onboarding Vision and Traditional Approaches
Money laundering is a significant issue, particularly in the relatively new cryptocurrency market, but it’s hard to estimate its actual scale due to the nature of the activity. However, it’s believed that money laundering involves as much as $1.5 trillion worldwide each year, with a large part of it running through crypto exchanges. Therefore, companies cannot afford to ignore the problem, and fortunately, the latest technology allows them to attend to their KYB needs quickly and easily while staying compliant with the latest AML regulations.
This results in faster onboarding and a reduced risk of regulatory issues or exposure to fraud and other illegal activities. Vespia is committed to being part of this change and introducing a new standard for business verification. To try Vespia, please request a demo here.
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