Cryptocurrency Firms Under Scrutiny as Survey Exposes Weaknesses in Customer Verification Practices

Picture Source: BeInCrypto

Recent survey data released by SmartSearch has illuminated concerning gaps in the commitment of cryptocurrency firms to robust customer verification processes. The findings reveal that a significant number of these firms are failing to adequately verify customer lists against sanctions or politically exposed persons (PEP) records, raising concerns about compliance within the cryptocurrency industry.

Inadequate Customer Verification

The survey, conducted by digital compliance firm SmartSearch, delved into compliance practices across various industries including high-street and challenger banks, cryptocurrency platforms, property developers, and gambling companies. The study involved 500 UK compliance decision-makers aged 18 and above and was conducted by Censuswide between May 26 and July 2, 2023.

The data highlights a disconcerting trend: only 17% of cryptocurrency firms consistently verify new customers, while half of them admit to conducting such checks only sporadically. This lax approach to customer verification is worrisome, as it leaves room for potential misuse of the platforms for illicit activities.

Larger Compliance Problem

The survey’s results point to a broader issue within the cryptocurrency industry—complacency towards compliance. Martin Cheek, the managing director of SmartSearch, expressed his concerns, stating that simply screening new customers “on occasions” falls short of the necessary diligence required by the rapidly evolving compliance landscape.

Cryptocurrency firms are under greater scrutiny as regulatory authorities, including the Financial Conduct Authority, ramp up their efforts to prevent sanctions evasion and money laundering, especially concerning digital assets.

Evolving Compliance Landscape

The findings also highlight the evolving nature of compliance in the cryptocurrency sector. Following the imposition of sanctions on Russia due to its invasion of Ukraine, around 42% of over-the-counter (OTC) traders have adjusted their compliance procedures. Similarly, over 52% of crypto exchanges have adopted additional measures. However, these numbers indicate that more needs to be done to ensure compliance with regulations.

UK Regulations and Challenges

The United Kingdom, like many other countries, has been grappling with the challenges posed by cryptocurrencies and their potential to obscure financial transactions. In 2020, the UK updated its Money Laundering and Terrorist Finance Act to strengthen regulations and provisions related to combating money laundering and terrorist financing. The law extended due diligence requirements to virtual currency exchange providers and custodian wallet providers.

A previous survey by SmartSearch revealed that money laundering remains a growing issue within the crypto industry, with 28% of crypto firms reporting an increase in Suspicious Activity Reports over the previous six months.

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The survey’s findings shine a light on the urgent need for cryptocurrency firms to enhance their customer verification practices. In an environment of increasing regulatory scrutiny and evolving compliance requirements, complacency can have serious legal and financial consequences. As cryptocurrencies continue to gain prominence in the financial landscape, proactive efforts to adhere to regulations and combat illicit activities become paramount to foster legitimacy and trust within the industry.

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