One of the newest and exciting topics in payments is cryptocurrency. Bitcoin, the first decentralized cryptocurrency, arrived in 2009 and soon exploded in value. Its decentralized nature, made possible by blockchain technology, promised to disrupt the status quo in the heavily regulated payments industry.

Within years of Bitcoin rolling out, the number of different cryptocurrencies expanded into the thousands and virtual asset service providers (VASPs) set up crypto exchanges to allow people to buy and sell various cryptocurrencies. By January 2020, the cumulative market capitalization of crypto totaled over $271 billion.

Although the growth of crypto has been remarkable, many consumers and financial institutions remain hesitant to buy and sell crypto assets because of security concerns. If VASPs want to become a part of people’s everyday financial lives, they must embrace reasonable and responsible regulations, especially related to Know Your Customer (KYC) identification and authentication.

To learn more about how VASPs can secure crypto exchanges through better KYC solutions, PaymentsJournal sat down with Anatoly Kvitnitsky, VP of Growth at Trulioo, and Tim Sloane, VP of Payments Innovation at Mercator Advisory Group.

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Most VASPs have weak KYC requirements

The current state of KYC compliance among VASPs around the world is weak. As the graph below indicates, at least half of VASPs in all regions of the world have weak or porous KYC standards.

“It’s quite concerning,” said Kvitnitsky, but “to be honest, I’m not surprised as a participant in the cryptocurrency ecosystem.” He explained that of the dozen or so initial coin offerings—which are commonly known as ICOs and refer to when a cryptocurrency goes public—he’s participated in, only one did proper KYC procedures.

A lot of the time, KYC will consist of having someone take a picture of themselves holding their ID, and an employee then approving or rejecting that photo. That “is not meeting KYC, no matter what country you’re in,” said Kvitnitsky.

Sloane pointed out that by failing to adequately secure exchanges through effective KYC standards, VASPs have created an opportunity for fraudsters.