CipherTrace Geographic Risk Report Maps Hotspots Where Virtual Asset Service Providers have Deficient Know Your Customer Practices
Groundbreaking report reveals that the United States has the most VASPs with Weak KYC, due in part to DEXs with little to no user identification and verification processes.
Menlo Park, CA – October 1, 2020
Leading cryptocurrency intelligence company CipherTrace reveals in its 2020 Geographic Risk Report that 56% of the global VASPs analyzed have weak or porous KYC processes. Over half of the Virtual Asset Service Providers (VASPs) in every region have deficient processes for user identification and verification. By analyzing and probing the Know Your Customer (KYC) processes of over 800 VASPs in over 80 countries, the research geographically located where weak and porous KYC could be exploited by money launderers, criminals, and extremists.
This is the virtual asset industry’s first comprehensive global KYC risk assessment. Strong KYC requires users to verify their ID and provide proof of address and may also incorporate a phone or video interview. CipherTrace researchers labeled VASPs as having weak KYC if they had major deficiencies in their KYC process, allowing for any daily deposit or withdrawal with very minimal to no KYC collection and verification. Typically, just an email address, name, and perhaps a phone number was necessary to create accounts at these exchanges. VASPs were labeled as porous if they required some sort of ID verification process for withdrawals past a specific dollar amount.
US, SINGAPORE, AND UK HOST THE MOST VASPS WITH KYC DEFICIENCIES
Europe is the region with the highest count of VASPs maintaining deficient KYC procedures with 60% of European VASPs having weak or porous KYC. The United States, the United Kingdom, and Russia lead as the three countries with the highest numbers of VASPs with weak KYC. However, when looking at the countries with the highest count of combined weak and porous VASPs, the US, Singapore, and the UK take the lead.
DEFI VOLUME GROWTH CREATES REGULATORY RISKS
While the financial activities of DeFi platforms are decentralized, frequently the governance of DeFi projects is more centralized. DeFi protocols are designed to be permissionless so anyone in any country is able to access them with zero regulatory obstacles. Daily volume now exceeds $4 billion USD.
“We’ve seen [DeFi] projects that are subject to vulnerabilities, attacks, hacks, manipulation,” said SEC Crypto Czar Valerie Szczepanik at the Parallel Summit on September 18, 2020. “We’ve seen structures that purport to enable users to lend money, earn interest, borrow money, exchange, take positions; these are all financial activities and they are likely subject to various laws already, including securities law, potentially banking and lending laws—definitely AML/CTF laws.”
CipherTrace found that over 90% of DEXs with a clearly domiciled country had deficient KYC practices, with 81% having little to no KYC.
CipherTrace CEO Dave Jevans expressed, “Anti-money laundering and record-keeping regulations will soon be enforced whether VASPs and other financial institutions are ready or not. For VASPs and banks in need of virtual asset risk mitigation solutions to meet their compliance obligations, CipherTrace offers VASP intelligence to help financial institutions monitor transactions and flag payments with risky VASPs. Effective user verification is the foundation for financial institutions and cryptocurrency businesses to deploy a risk-based approach to money laundering and to ensure they are abiding by BSA travel rule law in the US and FATF travel rule guidelines globally.”
SEYCHELLES HOSTS TWO-THIRDS OF AFRICAN-DOMICILED VASPS WITH WEAK OR POROUS KYC
Cryptocurrency exchanges have been relatively sparse throughout Africa because of the difficulty involved with opening cryptocurrency businesses throughout the continent, but P2P trading flourishes on marketplaces like Paxful and LocalBitcoins. Africa’s overall KYC skews weak by the Seychelles, where large exchanges are domiciled and whose consumer base is foreign. 70% of Seychelles-domiciled VASPs have bad or porous KYC—this totals 75% of all of Africa’s KYC deficient VASPs—making the small island country a potential haven for money launderers.
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CipherTrace, leading cryptocurrency intelligence company, protects financial institutions from crypto laundering risk and is helping to grow the crypto economy by making virtual assets trusted by governments and safe for mass adoption. CipherTrace delivers the world’s most comprehensive cryptocurrency intelligence to detect money laundering, inform law enforcement investigations, and enable regulatory supervision. CipherTrace founders are dedicated to protecting consumer privacy, while defending against illicit finance. Deep expertise in cybersecurity, eCrime, payments, banking, encryption, and virtual currencies form the foundation for CipherTrace’s commercial offerings. For more information, visit www.CipherTrace.com or follow us on Twitter @CipherTrace.