Jan 4, 2021

Crypto exchanges and their compliance / KYC framework

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Crypto exchanges and their compliance / KYC framework

As well as all types of online agents, from ecommerce to banking, crypto exchanges must meet the same requirements of all those regulations affecting them on AML and customer identity verification.

However, not all crypto exchanges comply in the same way with their responsibilities in terms of compliance. The implementation of AML (Anti-Money Laundering) controls and KYC processes is essential for these platforms to operate online with guarantees and security.

Download here the complete guide on AML5 and eIDAS, the regulatory standards to operate online.

What is a crypto exchange

Cryptocurrency exchanges or crypto exchanges are the online tools and platforms that allow and facilitate the sale of bitcoin or any type of cryptocurrency.

Generally, this name or category corresponds to a virtual space as if it were a common trading platform, but it is specialized in cryptocurrencies. The user, also known as a trader in these cases, is allowed to trade in the crypto market.

Since Bitcoin appeared in 2009, the evolution of this area has been impressive and its extension and expansion, as well as the appearance of different platforms that have made them more and more accessible to a wider public, have fully affected economy and global finance.

That is why identity verification and KYC processes have become the focus of attention for both cryptocurrency exchanges and users of these platforms.

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How cryptocurrency exchanges work

The basic operation of a cryptocurrency exchange consists, as we have been advancing in its definition, in carrying out both buying and selling operations of the different cryptographic currencies available: Bitcoin, Ethereum, XRP, Tether… 

However, despite crypto trading being the central axis of crypto exchanges, one of the most delicate and important processes with respect to their operation is the one that occurs when deposits, withdrawals, or purchases of cryptocurrencies are made with fiat currency, such as the Euro or the Dollar. This is where a key situation arises that increases the need for AML and KYC control and management of cryptocurrency exchanges.

Types of exchanges: 

The different types of crypto exchanges define their operation and present a series of needs and characteristics that affect their operations and the way in which they are carried out:

  • Traditional exchanges: They are trading platforms in which the purchase and sale are carried out according to the market price. They are usually regulated and have very specific KYC, AML, and identity verification needs.

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  • Cryptocurrency brokers: These platforms are focused on the sale and purchase of cryptocurrencies at fixed prices; that is, the exchange of some currencies for others at market prices. 
  • Direct Trading Platforms (OTC): Over-The-Counter platforms connect buyers and sellers who offer exchanges at a set price by themselves and not by the market.
  • Cryptocurrency funds: More than platforms, these are initiatives for the management of investments in crypto. Users do not have the need to actually store or buy the currencies. Negotiations of a part of the investment portfolio and participation are proposed. Generally managed by finance professionals, they typically meet AML and KYC requirements.
  • Decentralized Exchanges (DEX): They are the automated and autonomous evolution of traditional exchanges. Some of them are only supported by their programming and can be somewhat insecure if they do not meet the appropriate standards in terms of compliance.

The best cryptocurrency exchanges

We can notice how articles with lists of the best cryptocurrency exchanges can be found on the internet. These rankings are basically made from data on the popularity and number of users of the different platforms. 

Although they can be very useful, the reality is that the vast majority do not take into account the main aspect for which one should choose one cryptocurrency exchange over another: security and their commitment to an adequate compliance policy.

Safest Crypto Exchanges

We will know that we are facing a baseline cryptocurrency exchange when it complies with current regulations and regulatory standards. This implies having established processes and controls oriented towards:

According to a recent study by CipherTrace, more than half of all crypto exchanges of various types have weak or no identity verification methods. This makes them vulnerable to attacks by potential offenders, at the same time that endangers users of the platform.

Download here for free our guide on digital identification.

The importance of digital identity and KYC

Although it seems that even, in some areas, more than 60% of crypto exchanges are not complying with the proper guidelines, establishing digital identity procedures and KYC process would not only make them comply with the current regulations but would grant them a series of additional benefits that would boost their activity and legitimacy.

That the agents of the cryptocurrency sector, including crypto exchanges, comply in terms of compliance and adapt to the pertinent regulations will cause cryptocurrencies to finally generalize their use.

Discover in this article all the keys to the democratization of cryptocurrencies, their extension, and their real penetration in society and economy.

eID, Regtech partner for crypto exchanges

Electronic IDentification works with clients in the sector such as Onyze to promote crypto exchange platforms from a safe, guaranteed, and quality perspective.

The development of our VideoID, SmileID, and SignatureID solutions responds to the compliance need of online agents to operate safely for both themselves and their clients while increasing their user acquisition.

eID is committed to the definitive impulse of the crypto exchange sector and develops solutions to enhance its expansion through scalability with advanced customer acquisition tools both at the normative and regulatory level as well as commercial improvement.

Contact eID through this form and work with us to promote cryptocurrencies.

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