Why KYC Is Broken Right Now
The intentions behind KYC (Know Your Customer) are well intended. To prevent terrorists, criminals, money launderers, and tax evaders from accessing financial services. And, in fact, the requirements are pretty straightforward. Customers need to verify that they are who they say they are. Plain and simple. So, why is KYC such an expensive, drawn out, and inefficient procedure?
A Little Background on KYC
Not to be confused with the fast-food fried chicken chain, banks have had to comply with KYC (not KFC) practices for several years now. In the US, KYC emerged out of the Patriot Act, the Bush administration’s response to 9/11. One of its aims was preventing any future financing of terrorism.
Globally, KYC and AML (Anti Money Laundering) requirements are changing all the time. That creates confusion, uncertainty, and delays in onboarding customers. Lack of clarity on KYC requirements means that there’s no real standard to follow–even within the same jurisdiction. This results in financial services institutions (FSIs) implementing their own variations of KYC.
And since they’re terrified of being found non-compliant and facing crippling fines in the millions of dollars (Deutsche Bank was fined over $200 million for unacceptable AML protocols last year) they tend to err on the side of caution. This makes KYC unnecessarily complicated.
Now let’s consider cryptocurrency exchanges dealing with global customers where different laws apply. While KYC is in its infant stages in this industry, there are already plenty of problems caused by it and a lot of guesswork and noncompliance.
In fact, a recent study by PAID found that two-thirds of cryptocurrency exchanges in the US and EU (where KYC is required) fail to comply with requirements. They ask for nothing more than an email address and a phone number. So, that means they don’t know much about their customers after all.
And that’s what makes the vast majority of banks hesitant to work with cryptocurrency exchanges, forcing them to relocate to friendlier pastures like Malta or the Cayman Islands. So, what are the main issues with KYC and why is it failing so miserably right now?
Customers Don’t Like It
Tough luck, you might say, if your customer happens to be a criminal. Of course they won’t like being forced to reveal their identity. But no legitimate operation, be it a cryptocurrency exchange or FSI, wants profits from drug sales or human trafficking floating through their systems.
At Digitex, we want to represent the interests of upstanding citizens, not criminals. However, the downside of KYC is that it punishes the sweeping majority of investors who are decent people and simply want to sign up and start trading.
It’s Getting Continually Harder
According to a survey by Thomson Reuters, opening a bank account in the US took 22 percent longer in 2016–and an additional 18 percent longer in 2017. Let me break that down for you: banks take an average of 24 days to fully onboard a customer. Imagine such a lengthy timeline when it comes to cryptocurrency trading!
And when KYC isn’t required by all jurisdictions, that means that crypto exchanges aren’t competing on a level playing field. Those with minimal or zero requirements can be more agile than those that are required to ask customers for their sensitive information. Many a crypto exchange has missed out on customers thanks to the frustrations of KYC pushing them to an offshore competitor. Others have been forced to shut down.
KYC Is Expensive
Banks are already spending around $500 million per year on KYC and it’s pushing up the cost of onboarding new clients. And if the costs of KYC are prohibitive for large banks, just imagine how that affects smaller cryptocurrency exchanges. Yet for the 68 percent of exchanges not currently complying with KYC, if they don’t move jurisdictions or step up their games, they could face suspensions, penalties, and even jail time.
Against this panorama, plenty of cryptocurrency exchanges are scrambling to comply, asking users to upload an ID card or perhaps an additional note proving they are who they say they are, signed and dated. But, again, as with banks, this KYC process is performed with poetic license, with each exchange coming up with its own version.
KYC takes up a severe chunk of their profits and a lot of their time. Not only collecting and validating data, but also the risk associated with storing it. After all, if exchanges can get hacked for crypto, they can also get hacked for data. Our goal at Digitex is to allow for frictionless, commission-free trading. The last thing we want it to drag our customers through invasive fact-checking missions that delay onboarding and affect liquidity.
Verification Isn’t Portable
Since no one exchange can cover all the needs of cryptocurrency traders, they must work with more than one. Fiat to crypto, crypto to crypto, OTC trading, and futures. And customers have to through the lengthy process over and over again at the next exchange.
Unlike showing a passport as a universal and acceptable form of ID, KYC has no standard from bank to bank, exchange to exchange, country to country. You may need to show a utility bill, a national ID card, a passport, or a selfie with a note. You may not be allowed to use the exchange at all.
Legitimate blockchain companies and cryptocurrency exchanges have no reason to fear regulation. In fact, we welcome sensible regulation as a way of offering us a clear framework within which to work. However, most regulation so far has been focused on KYC and the guidelines are vague and unhelpful.
As cryptocurrency exchanges grow and scale to take on more investors, we face a dichotomy. Get overzealous with enforced KYC and miss out on onboarding customers or do too little and risk being penalized or getting the cold shoulder from banks.
With all this amazing technology around us, KYC has no business being such a complicated business. Why don’t we place all the information we need in one verified identity on the blockchain?
A portable, unique, blockchain agnostic credential that customers can take from bank to bank, exchange to exchange, that allows for trustless trading. Until KYC can be as quick as one click upon sign up it’s only going to slow businesses down while being riddled with inefficiencies.