A new study by on-chain analysis firm CipherTrace found that most Know Your Customer (KYC) processes in Bitcoin and crypto exchanges can be exploited by money launderers, criminals and extremists.
Only recently, the founders of BitMEX were indicted in a landmark case in the USA.
Not only exchanges in the USA, Great Britain and Singapore demand KYC
According to CipherTrade, over 56% of all crypto-currency service providers worldwide have a „weak or porous“ KYC process, such as wallets, money exchanges and others. The metric means that criminals and money launderers can use such services to deposit or withdraw their ill-gotten funds with very little or no KYC.
According to CipherTrace, companies in the U.S., Singapore and the U.K. are leading the way – despite the strict financial regulations in these three regions.
„Although these regions generally host a higher volume of crypto service providers, the large number of VASPs in these countries, which require little to no KYC, shows how easy and extensive potential exit opportunities for money launderers are,“ the report said.
According to the analysts, more than 60% of the world’s 10 „worst KYC countries“ are in Europe, 20% in Latin American and Caribbean countries and the last 20% in APAC countries.
Due to strict, or rather non-existent, regulations regarding digital currencies, most crypto-companies are forced to operate in non-transparent countries and open accounts in a tax haven like the Cayman Islands.
Lax KYC means, however, that regulators can still catch users and charge fees to business owners – as yesterday’s regulatory action against BitMEX showed.
The great DeFi risk
CipherTrace also points out that the burgeoning decentralized financial market (DeFi) on Ethereum – which has grown to over $10 billion in recent months – has characteristics of money launderers and is ripe to be exploited by them.
The company explains that even if the operations (i.e. the smart contracts and other technologies) are decentralized, their actual management and the presence of board members who manage such projects could mean that regulatory problems lie ahead.
The researchers found that over 90% of DEX with a clearly domiciled country had poor KYC, while 81% had little or no KYC. According to some regulators, despite its decentralized nature, this could be a „compliance violation“ and cause legal problems.
The company quotes Valerie Szczepanik from the US Securities and Exchange Commission in this context:
„[DeFi projects] are probably already subject to various laws, including securities law, possibly banking and credit law – definitely AML/CTF laws.“
Bill Barhydt, the co-founder of the crypto-wallet Abra, also expressed similar concerns yesterday after US courts summoned the three founders of BitMEX.
Regulation could therefore come sooner than one thinks.