Securing funds and identifying users is critical to keeping crypto exchanges and related products safe. With the recent growth in new technologies dealing with crypto, it is essential to protect them with additional controls. They all should follow similar building blocks, whether building an NFT marketplace or shoring up your KYC program for crypto exchange. Regulators are paying more and more attention to the sector, and it is now required to run a stringent compliance program for more than just fraud losses. Banking partners especially will want to ensure that you follow all regulations as risk management is their end goal.
Software and technology are not the only components to focus on for KYC and compliance. However, we will dive into different technical parts that should be in place. To start, the people and processes documented are needed to build your program. When you are audited, it will be one of the first things to be reviewed to ensure proper documentation of all your controls. Knowing which countries and customers you will be servicing can help you decide the software and processes to implement. Next, having the best KYC systems will be meaningless if they are not designed and run by a competent compliance team. Constant training and improvements on the system are required to catch evasive fraud actions.
To start, the basic checks will be passive fraud and high-risk identification. Most regulators like the FATF want you to take a risk-based approach. It also will be the best return on your investment as each tool may cost more depending on volumes. NFT marketplaces should be especially careful during any crypto to fiat exchanges. While most are avoiding any relations with fiat, regulators will pay more attention to the industry when they catch up on oversight. Adding fiat exchanges as an option raises your risk levels tremendously, making the business model almost the same as a crypto exchange. Crypto exchanges already have oversight and regulatory measures to follow in many countries, and we will go over a brief list of technologies any business in the blockchain industry should leverage.
List of technologies to use for a robust KYC and AML platform:
AML Databases – These are required for PEPs and other sanction lists. Some are free by various governments, while other services provide lookups as an option. Ongoing checks, as well as media searches for a person’s information, are useful. This check can be integrated during onboarding to search via an API on the person’s provided information.
Digital Fingerprinting – Tracking repeat and networked users is another basic layer to include to identify repeat customers. It also can feed into your machine learning models to learn quickly about fraud trends. This check should be integrated into all interfaces with your customer through apps or a website. Again this is something that can be built out or through a vendor that specializes in tracking devices.
Risk Machine Learning – Having a system that can comprehend the massive amount of data collected on your users is critical to detecting high-risk users. Manual checks are suitable for lower volumes, but a machine learning system that can output scores and reasoning will help you focus attention. Also, do not assume a rule system is outdated as it can still be beneficial for uncomplicated cases of fraud and new trends that your model is not trained on yet.
Identity Verification – Identity verification is a critical component in which Trust Swiftly expertise allows for verifying multiple use cases. Collecting identifying information such as an ID and selfie and foundational to many KYC programs. Putting a face to your customer is just one of many ways to verify their identity.
Blockchain Analysis – Receiving and payouts to specific blockchain addresses could identify risk right away. Services such as crystalblockchain.com help identify risky or hacked funds. Using these types of software is another way to catch fraudulent funds and avoid mixing your service with bad actors. Just like how banks can be blocked for their SWIFT, ACH, etc., due to an industry-wide warning, there needs to be a similar function through blockchain analytics.
Identity Enrichment – Identity enrichment can append additional data points about a customer from outside sources. While this may relate to AML databases, it can encompass many more third-party data sources. From dark web monitoring to a source of income analytics, there are endless sources to provide a better picture of a person.
Building out this stack of technology takes time and should be carefully rolled out to understand each component. The key to keeping fraud down and compliant is to orchestrate these technologies to create a more secure offering. While the crypto and NFT industry may be growing exponentially, there are still many reminders that security and compliance are foundational to its success.