Building next-generation global financial systems

The price gains of Bitcoin during 2020 have been phenomenal, approaching 300% for the year. But is it just speculation or a longer-term, fundamental change in the way the world economy operates? If it is the latter, how can cryptocurrency companies prepare for widespread adoption and increased regulatory requirements, while also ensuring their operations are fast, secure and seamless?

Some of the contributing factors driving the increased use of cryptocurrency include:

• The COVID-19 pandemic has significantly impacted the global economy. As a result, central governments have created massive amounts of fiat currency. For example, the U.S. Government created over $3 trillion in new funds earlier this year. Many financial experts expect this to continue and some are looking at safe ways to store value like Bitcoin, which has a hard limit of 21 million units that can ever be issued.
• Technical innovations are starting to emerge that promise to rapidly increase the amount of transactions that cryptocurrency networks can facilitate. On December 1, 2020, Ethereum 2.0 Phase O was launched, which is designed to make the current second-largest blockchain more scalable, secure and sustainable. Ethereum is potentially game-changing for the financial sector due to its ability to deliver quick payments, enable automated “smart” financial contracts and create a new decentralized financial system (DeFi).
• While there is still some uncertainty, the advantages and problematic issues surrounding cryptocurrency compliance are becoming more familiar to lawmakers and regulators. Increasing regulatory clarity should improve trust in the crypto market by institutional investors and the general public.
• Usage continues to grow and more major players are starting to offer cryptocurrency services, including PayPal. As access becomes easier and more mainstream, public acceptance also adds to the growth potential of the sector.

Cryptocurrency companies are preparing for growth

As companies in the cryptocurrency industry are already experiencing massive growth, implementing best practices now is fundamental to continue scaling and global expansion.

They need to navigate complex regulatory and market developments around the globe and continually  develop new policies and processes to stay current in this quickly evolving industry.

Staying compliant

While there are numerous global laws or regulatory landscapes around the use of cryptocurrency, in general it is a considered a regulated (or obliged) industry. For those jurisdictions that don’t have specific laws around its use, existing laws around money service businesses or other financial regulations are applicable.

Ensuring compliance prevents fines and potential sanctions, while also ensuring that reputational damage is avoided. Many companies that have ignored or tried to bypass these requirements find themselves in legal trouble, if not being outright shut down.

So, any company that wants to continue to grow and prosper is well advised to seriously consider their compliance requirements. One such criteria, noted above, is the need to provide identifying information to help comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.

Ensuring these identity requirements are met in any and all markets simplifies and accelerates international expansion plans for any company.

Protecting against potentially fraudulent activity

Effective identity verification procedures also deliver fraud prevention measures, helping safeguard both the company and their customers. By helping to stop accounts that are illegitimate during the onboarding stage, bad actors have less chance to penetrate the system. These measures also help customers as their accounts are less likely to be stolen or otherwise used without their consent.

A tiered approach to verification

Having different levels of identity verification checks, depending on usage, is a smart technique to help implement a risk-based approach. Threshold limits allow quick onboarding of most new customers. Threshold limits also introduce more due diligence on higher-value accounts, allocating stringent checks only on accounts that pose the most risk.

For companies that are interested in expanding their global cryptocurrency operations, identity verification is a critical component of success. Effective identity verification processes help:

• Enable compliance with AML/KYC laws
• Provide fraud prevention measures
• Create a risk-based approach for better customer risk management

Enabling an identity verification system that can adjust to different market requirements and different risk scenarios provides the flexibility to quickly scale and better deliver on the promise of next-generation global financial systems.