Cryptocurrencies are digital money and they are traded almost entirely online. They do not have any physical denominations and they can be transferred without any intermediaries. The emotions connected with cryptocurrencies, however, are absolutely real. They excite the minds of investors, they have as many supporters as opponents, and the number of types of funds in which we can invest is increasing all the time. The times when only Bitcoin and Ethereum were the staple cryptocurrencies are over. There are now thousands of cryptocurrencies that we can choose from. Companies such as Facebook and Amazon are starting to think about creating their own crypto-funds and are following in the footsteps of countries such as Ecuador, Singapore, and Tunisia. Celebrities are also starting to think not only about investing in cryptocurrencies but about creating their own cryptocurrencies as well. The most controversy surrounding the crypto industry comes down to security. Are cryptocurrencies still a mine of anonymity and heaven for fraudsters? How are KYC or AML regulations able to increase the sense of security among customers? What makes the crypto industry so attractive for investors?
A cryptocurrency is a digital asset whose primary purpose is to be a medium of exchange. Transactions are carried out with the help of cryptographic functions that allow you to control and create new units and transfer assets. The oldest and most popular cryptocurrency is Bitcoin.
What makes cryptocurrencies so special is their decentralization. They are not subject to any top-down institution or a bank. On the one hand, it seems encouraging, on the other, you have to remember that cryptocurrencies do not have the same protection as money in a bank. If your account is hacked or your funds are lost fraudulently, or if you just lose the drive where the cryptocurrency was stored, government institutions and your bank will not be able to help recover your funds. Besides, most cryptocurrencies use blockchain technology which is a system that stores and transmits information about internet transactions. Blockchain is a digital transaction ledger and its system is decentralized. Information is stored in data blocks that are scattered throughout the network and archived by everyone using it. Blockchain uses advanced cryptography, so it is resistant to forgery attempts, as all modifications are intercepted and rejected.
Interest in cryptocurrencies and investing in them is a real rollercoaster of emotions. Their value may change from hour to hour and if it is falling, there is no guarantee that it will rise again. Risk is a fundamental component of cryptocurrencies and must be taken into account. Cryptocurrencies can be bought or mined in a special process. Mining is currently completely non-profitable for Bitcoin, but there are hundreds of different assets for which mining makes sense and can be profitable.
What attracts people to cryptocurrencies are fast payments and very low transaction fees. However, the difficulty of regulating cryptocurrencies and relying on their leaps in popularity makes them particularly vulnerable to fraud. The rapid increase in their popularity meant that fraudsters also pursued cryptocurrencies as a way to finance their activities. Financing terrorist activities or money laundering using cryptocurrencies seemed simple. Anonymity and the fact that it was impossible to track funds increased the attractiveness and led to the fact that the crypto industry is perceived negatively by some people. However, this conviction is a relic of the past. To be able to develop further, crypto exchanges implement appropriate AML and KYC procedures to protect themselves and their clients from fraudsters. How big of a problem for the global economy and the crypto industry is money laundering? How can the regulations be implemented and how much do they differ from one another?
One of the complications that stand in the way of greater transparency of cryptocurrencies is regulations. Each country introduces its own restrictions, controls, and rules of use. Canada, Japan, and Germany began to be interested in security issues in the context of cryptocurrencies very early. Their regulations are often exemplary for other countries that are just taking up the topic. The main source of inspiration for other countries is also the regulations and actions published by FATF (“The Financial Action Task Force“). The organization deals with general security regulations and activities supporting the CTF (Counter-Terrorism Financing Laws) and AML policy, also in the context of cryptocurrencies. FATF recommendations contribute to the improvement of transparency in financial institutions and help to define indicators related to higher security standards. The European Union is also on the way to regulating the legal issues related to cryptocurrencies. At the end of 2020, a project called MiCA (“Markets in Crypto-Assets Regulation“) appeared, which is going to introduce common regulations for all member countries and set global standards for other regions.
Most countries have treated cryptocurrencies as a niche for a long time and warned people against the risks of investing in them without taking any specific steps. Their perceptions changed when cryptocurrencies were used as means of payment in criminal activities. The existing AML and CTF regulations had to be appropriately modified and also take virtual measures into account. The scale of money laundering activities is difficult to quantify but significant. In the UK, around two hundred thousand of these crimes are reported annually, and the Indian Government reports that $18 billion each year is gone because of money laundering. Although statistics show that banks and other financial institutions are largely responsible for the high numbers, cryptocurrencies can also enable such activities. In 2019, 97% of cataloged ransomware requested Bitcoin payments, and Europol data shows that the amount of money laundering with Bitcoin was (as of 2009) $ 4.5 billion.
Cryptocurrency providers have a legal and ethical responsibility to stop untrustworthy people from using their services. However, this process should be as quick and painless as possible for new customers. The lack of properly implemented KYC and AML procedures makes cryptocurrency exchange platforms more vulnerable to malicious attacks. Transparency and full security can be achieved with the identity verification process. Remote service allows the user to complete the procedures from anywhere in the world. Fully – Verified offers video identity verification, which significantly increases security standards and can meet even the strictest requirements. As cryptocurrencies belong to high-risk businesses, such verifications should be carried out with a specialist who can properly check the documents and observe the user’s behavior. Live screening helps to eliminate fraudsters and suspects who would prefer to seek anonymous opportunities. Identity verification has a large impact on the company’s transparency and how it gains in the eyes of potential business partners.
Fraud and scandals related to money laundering or terrorist financing have meant that cryptocurrencies have to rebuild their reputation and try to counter the harmful stereotype of the anonymization of processes. More and more exchanges are trying to provide identity verification and are trying to make the process of buying funds without an ID impossible. The data from 2019 stated that only 0.17% of funds received by cryptocurrency exchanges were sent directly from criminal sources. It might have sounded optimistic by that time. However, in the first five months of 2020, cryptocurrency fraud and thefts were already at $ 1.36 billion, and that trend has led to speculation that 2020 could break the 2019 record in this regard. The increase in virtual crime was caused by a pandemic that has severely exposed weaknesses in the security field.
Cryptocurrencies are still a hot topic. We can observe the emotions caused by the increase in their value on the stock exchange and how popular they are. When delving into the crypto world, you need to remember the risks associated with investments and be sensitive to security issues. Identity verification and implementation of KYC and AML regulations can significantly improve customer experience and protect exchanges. Trust is the base of all relationships, and it should be present in our everyday life and business.