📕 Better than Yesterday #40: Prevent Financial Crime in Crypto Part 2
In our last post, we explored the foundations of financial crime prevention in the crypto space and the importance of implementing Know Your Customer (KYC) protocols.
While KYC is a widely adopted measure to deter illegal activities, its effectiveness in the complex world of cryptocurrencies remains a topic of debate.
In this follow-up, we will explore KYC's limitations more thoroughly and assess whether it truly provides the level of security we expect.
ℹ Do KYC Effectively Prevent Crime?
To make the right conclusions, let’s have a look at the level of financial scams in traditional finance.
Financial institutions in the USA report staggering losses, with an average of $102M stolen through various scams. 62% of surveyed institutions reported an increase in the scam volumes.
Almost half of financial scams are committed by unauthorized parties—those who take over a victim's account or misuse the victim’s account information.
This raises a crucial point: even after passing all KYC procedures, criminals can still take over a verified account to commit fraud.
The responsibility doesn’t rest solely on KYC processes but also on the security measures implemented by individuals and financial institutions.
As evident, KYC alone doesn’t offer as much protection against scams as one might hope.
And one more detail: the rate of identity theft crimes is increasing. In the USA only, traditional identity theft losses amounted to $24B in 2022, with more than 15 million US consumers affected.
ℹ Why Is There No Solution Yet?
While KYC is undeniably useful, the rapid pace of technological advancement poses significant challenges.
Financial institutions often struggle to keep up with the latest threats, while criminals are quick to exploit new technologies to their advantage.
Moreover, the process of enacting regulations is slow, taking years, whereas criminals can devise new schemes in a fraction of that time.
Crypto, by its nature, is borderless. Regulations that work in one country may be ineffective in another, allowing criminals to exploit these gaps.
The challenge lies in coordinating a global regulatory framework that is consistent and effective across borders.
However, even the creation of such a framework doesn’t guarantee the eradication of financial crime. Despite its stringent regulations, the traditional finance sector still suffers from financial crimes.
ℹ What Is the Solution Then?
Introducing a comprehensive regulatory framework would help to some extent, but it would not solve the problem completely.
As an option, developing and introducing blockchain ID validation may also help to solve the problem.
Only ethical growth of humankind would solve the problem of financial crime and enable crypto mass adoption.
Once we stop using technological achievements to benefit illegally, we will be able to benefit from all the advantages that the anonymous nature of crypto is offering.
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