Research: Majority of EU, US Exchanges and Wallets Fail to KYC Users

More than two thirds of the leading cryptocurrency exchanges and wallet providers on both sides of the Atlantic fail to conduct proper identity verification checks. According to new research into their onboarding practices, most of the studied platforms do not meet the requirements of the upcoming regulations under the updated EU anti-money laundering directive.

Also read: Localbitcoins Updates ToS: ‘Some Situations May Require ID’

‘Crypto Identity Crisis’

The research, titled “The Cryptocurrency Identity Crisis: An Industry Scorecard for Digital ID Verification for KYC and AML”, looked into the onboarding practices of leading cryptocurrency exchanges and wallet providers in Europe and the US. Its main goal was to determine whether these prominent platforms implement proper Know Your Customer (KYC) procedures regarding new users. The study was conducted by P.A.ID Strategies and commissioned by Mitek, a provider of digital identity verification solutions.

The results show that 68% of 25 examined crypto exchanges and custodian wallets allow users to trade crypto and fiat currencies without conducting formal identification. These companies do not meet many of the requirements mandated by the upcoming EU regulations. They are not performing identity verification checks against official identity documents and lists of politically exposed persons. There is no sanctions screening or audit trail to trace criminal activity.

The EU’s fifth anti-money laundering directive, AMLD5, is due to come into effect next year. It is expected to bring crypto-related services in line with the standards applied to other financial products such as those offered by banks. That includes mandatory identity checks on new customers like those conducted by traditional financial institutions.

The European Parliament adopted the European Commission’s proposal for a Fifth Anti-Money Laundering Directive on April 19 this year. The document aims to prevent money laundering and terrorism financing through the financial system of the European Union. It was proposed by the Commission in 2016, even before AMLD4 was implemented by all member-states. The updated directive introduces stricter requirements for customer due diligence procedures and identity verification.

Exchanges and Wallets Ranked

Under the new rules, cryptocurrency exchanges and wallet providers will be obliged to apply for registration. The platforms in the study have been ranked according to how compliant their onboarding process is with the AMLD5 provisions.

Topping the list are exchanges like Coinbase, Gemini, Poloniex, and Itbit. All these require users to present official ID documents to begin trading. They have received an “ID Verification Score” of 9 out of 10. Platforms like Kraken, Bitstamp, Wirex, Local Bitcoins, Bitpanda, and Bitwala are also included in the survey.

A verified email address and a mobile phone number are often enough to sign up for the exchanges and wallets that do not have KYC procedures. The researchers note that both are easily obtainable without identification. Users can start trading with any email address and a number from a prepaid cell phone service.

“Cryptocurrency wallets and exchanges want to enjoy the same trust as the wider traditional financial services,” said John Devlin, Principal Analyst at P.A.ID Strategies, quoted by Real Wire. “Meeting regulatory demands ahead of AMLD5 coming into force could go a long way to changing this sector’s reputation as being something of a ‘wild west’,” he added.

Mitek COO Kalle Marsal believes that crypto exchanges and wallet providers want to change the “perceptions of lawlessness,” which in his words is a relatively straightforward fix. “Identity verification processes can be, if implemented correctly, simple for the customer and no barrier to signing up,” he argued.

Do you expect exchanges and wallets to comply with the stricter EU regulations? Share your thoughts on the subject in the comments section below.

Images courtesy of Shutterstock.

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