Markets
Modern fraud prevention measures stifle cryptocurrency market growth
Disclosure: The views and opinions expressed here belong solely to the author and do not represent the views and opinions of the crypto.news editorial team.
The number of cryptocurrency users in the global market has reached approximately 425 million or about 8% of the world’s connected population (est. 5.44bn). This number, while impressive, falls far short of the optimistic adoption estimates that investors were touting just a few years ago. Crypto.com, for example, foreseen a market with over a billion users in 2022.
A slow-growing user base has hurt the value of cryptocurrencies. Reduced liquidity in smaller markets makes it harder for traders to execute large orders without impacting prices, which in turn tends to generate more volatility and makes investing in crypto a risky proposition for the masses.
Markets function efficiently when they are full, as they create a more realistic market price. This also drives diversification opportunities, improves price discovery, and supports a wider selection of crypto tokens.
A number of reasons keep investors away from cryptocurrency opportunities, including a lack of understanding of blockchain, security considerations, and regulation. However, one overlooked factor preventing wider adoption is the unnecessary KYC protocols put in place to prevent fraud.
The process for a new user to sign up to an exchange should be simple, quick, and easy. You would expect to be able to purchase cryptocurrency within seconds using a credit card. This process, however, rarely works for new customers due to concerns about fraud.
New users are systematically subjected to lengthy and complex KYC processes, which include email and phone verifications, captcha solving, photo ID verification, and facial video capture.
Credit card transactions are not always allowed, and ACH transfers are limited to small amounts. Transactions are then often routed through 3DS, where they are unnecessarily rejected by issuers or exchanges that use inefficient rules to protect against chargebacks and costly penalties.
Know your customer (KYC) is an interesting example of an often unnecessary rule. Exchanges are required by law to comply with KYC regulations. However, many go above and beyond the law’s requirements, hoping that more KYC will protect them from fraud. For example, in the United States, KYC has a threshold of $3,000 before it becomes mandatory. Any cryptocurrency purchase below that threshold does not require KYC. However, all cryptocurrency exchanges put new customers through their KYC protocols for purchases as low as $100.
The sad reality is that not only do around 80% of frauds come from KYC-verified accounts, but they also represent an additional barrier to entry for new investors. Fraudsters have learned how to bypass KYC requirements by purchasing KYC-verified accounts for as little as $50 on the dark web.
KYC is an invaluable tool to help governments control money laundering, but it only creates the illusion of protecting exchanges from fraud. In reality, it enables more fraudulent transactions while adding friction upstream that often discourages new users from investing in cryptocurrencies. The end result is lost business, high fraudulent chargebacks, and artificial barriers to the adoption of cryptocurrencies by a wider population.
In a typical scenario, Jennifer L., a 27-year-old account executive, read an article about Ethereum and wanted to test the cryptocurrency waters. She went to Coinbase to purchase $20 worth of the coin. However, after adding her payment details, she was asked to upload a photo of the front and back of her driver’s license or passport. After submitting that, she was asked to upload a photo of herself holding her photo ID. Jennifer decided that $20 worth of cryptocurrency wasn’t worth the effort, abandoned the purchase, and is unlikely to try again any time soon. Cryptocurrency exchanges see these types of abandoned carts all day, every day.
Unfortunately, most payment systems automatically reject questionable customers. This hits new users the hardest, as they haven’t built a trustworthy reputation within the payment system.
Every industry has an ecosystem of businesses and vendors that rise and fall based on their performance, and the cryptocurrency market is no exception. Fewer investors means a smaller market for publishers, advertisers, investment advisors, and blockchain developers. There are also fewer opportunities to create new coins or technologies, develop marketing plans, and analyze the market.
Cryptocurrency could grow its market size, support a significantly larger ecosystem, and experience a golden age of innovation if it can find a way to streamline onboarding for millions of users who are being rejected due to fraud concerns. Reducing the need for KYC beyond regulatory requirements, moving away from rules-based credit approval systems, and leveraging behavior-based AI screening solutions would certainly help.
AI is capable of making accurate transaction approval decisions in a fraction of a second, making highly effective decisions in under 300ms, fast enough to track cryptocurrency purchases. It approves more first-time users while detecting and rejecting fraudulent users. When cryptocurrency exchanges move towards AI fraud detection, we will see the entire market reach its potential.
Alex Zeltcer
Alex Zeltcer Alex is at the helm of nSure.ai, leading the fight against chargebacks and protecting high-risk transactions from fraudsters. With over 20 years of diverse experience in IT, R&D, and sales, and as an active angel investor, he has been an advocate and pioneer in digital technology. Alex’s leadership has consistently driven scale, structure, and efficiency across multiple industries. Prior to nSure.ai, he led growth and innovation in digital gift cards, online grocery shopping, and 3D collaboration. As the former VP of R&D at Comverse, he managed a team of 250 engineers. His achievements are marked by his passion for technology, whether leading a spinoff to ship 200,000 orders, deploying large projects to tens of millions of subscribers, or significantly increasing revenue. Alex is a frequent speaker at conferences and forums and is a member of the Young Presidents’ Organization (YPO). Living in Tel Aviv, he enjoys personal activities such as cycling, cooking, enjoying a good glass of wine and spending quality time with his family.