Markets
Modern fraud prevention measures are slowing the growth of the cryptocurrency market
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 online population (estimated at 5.44 billion). This figure, while impressive, is far from the optimistic adoption estimates that investors were touting just a few years ago. Crypto.com, for example, predicted a market of more than a billion users in 2022.
Slow growth in the 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 tends to generate more volatility and makes investing in cryptocurrencies a risky proposition for the general public.
Markets operate efficiently when they are full because they create a more realistic market price. This also promotes diversification opportunities, improves price discovery, and supports a wider selection of crypto tokens.
There are several reasons that keep investors away from the opportunities offered by cryptocurrencies, including a lack of understanding of blockchain, security considerations, and regulation. However, one overlooked factor that is preventing wider adoption is the implementation of non-mandatory KYC protocols to prevent fraud.
The process of registering a new user on an exchange should be simple, quick, and easy. You expect to be able to buy cryptocurrencies in a matter of seconds, using a credit card. However, this process rarely works for new customers due to the risk of fraud.
New users are routinely 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 authorized, and ACH transfers are limited to small amounts. Transactions are then often routed through 3DS, where they are needlessly rejected by issuers or by exchanges that use ineffective 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 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 is mandatory. Any cryptocurrency purchase below this threshold does not require KYC. Yet, all cryptocurrency exchanges subject new customers to their KYC protocols for purchases as low as $100.
The sad reality is that not only do about 80% of frauds come from KYC verified accounts, but it also creates an additional barrier to entry for new investors. Fraudsters have learned to bypass KYC requirements, purchasing KYC verified accounts for as little as $50 on the dark web.
KYC is a valuable 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 up front that often discourages new users from investing in cryptocurrencies. The end result is lost business, costly fraudulent chargebacks, and artificial barriers to the adoption of cryptocurrencies by a broader population.
In a typical scenario, Jennifer L., a 27-year-old account manager, read about Ethereum and wanted to test the cryptocurrency waters. She went to Coinbase to purchase $20 worth of the currency. However, after adding her payment information, she was asked to submit a photo of the front and back of her driver’s license or passport. After submitting that, she was asked for a photo of her holding her photo ID. Jennifer decided it wasn’t worth the effort for $20 worth of cryptocurrency, abandoned the purchase, and is unlikely to try again anytime soon. Cryptocurrency exchanges see these types of abandoned carts all day, every day.
Unfortunately, most payment systems automatically reject questionable customers. New users are the most affected, as they have not yet built a reputation of trust within the payment system.
Every industry has an ecosystem of companies and vendors that evolve based on their performance, and the cryptocurrency market is no exception. Fewer investors means a smaller market for publications, advertisers, investment advisors, and blockchain developers. There are also fewer opportunities to create new coins or technologies, develop marketing plans, and analyze the market.
Cryptocurrencies can grow their market size, support a much larger ecosystem, and experience a golden age of innovation if they can find a way to accelerate the onboarding of the millions of users who are being turned away due to fraud concerns. Reducing the need for KYC beyond regulatory requirements, moving away from rules-based credit approval systems, and leveraging behavioral AI-based screening solutions would certainly help.
AI is capable of making accurate transaction approval decisions in a fraction of a second, making highly efficient decisions in less than 300ms, fast enough to track cryptocurrency purchases. It approves more new users while detecting and rejecting fraudulent users. When cryptocurrency exchanges evolve to AI fraud detection, we will see the entire market reach its potential.
Alex Zeltcer
Alex Zeltcer Alex leads nSure.ai, where he leads the fight against chargebacks and secures 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 is an advocate and pioneer of digital technology. Alex’s leadership has consistently driven scale, structure, and efficiency across various segments. Prior to nSure.ai, he spearheaded growth and innovation in digital gift cards, online grocery shopping, and 3D collaboration. As the former VP of R&D at Comverse, he led a team of 250 engineers. His accomplishments are marked by his passion for technology, whether it’s leading a spin-off to deliver 200,000 orders, rolling out major projects to tens of millions of subscribers, or dramatically increasing revenue. Alex is a frequent speaker at conferences and forums and is a member of the Young Presidents’ Organization (YPO). Based in Tel Aviv, he enjoys personal pursuits like cycling, cooking, enjoying a good glass of wine, and spending quality time with his family.