Exclusive: ‘What is driving IDV in crypto?’ – Delphine Chen, Wirex and Charles Roberts, IDnow in “The Paytech Magazine”

Delphine Chen, Business Compliance Manager at global cryptocurrency exchange Wirex, and Charles Roberts, who heads up the financial services team for Germany-based identity verification business IDnow, believe harmonised regulation and the use of biometrics are crucial for the future of the crypto industry

One of the biggest obstacles to mainstream cryptocurrency adoption is the widespread stigma of illicit activity attached to the crypto industry.

In an effort to dismantle the belief that cryptocurrency is largely unregulated and hazardous, the last couple of years have seen crypto firms implementing new identity verification (IDV) services, with  enhanced customer due diligence.

According to Delphine Chen, business compliance manager at global cryptocurrency exchange Wirex, despite many changes over the past decade, regulatory solutions are lagging behind technological ones.

“Regulators are still trying to find their way in terms of how to regulate enough, but not  too much”, says Chen. On the other hand, there have been numerous, innovative IDV solutions coming from third-party providers.

Crypto platforms have come a long way from asking users to upload a photo or scanned copy of their ID, and manually reviewing their documentation. Machine learning and artificial intelligence (AI) technology have been leveraged to automate this process. Users are now asked to take selfies holding their ID, while the technology scans the document and checks its originality, extracts information using optical character recognition (OCR) and performs facial recognition faster, and with more precision, than humans can.

German IDV services provider IDnow has taken it a step further by offering customer identity authentication via video calls. Recently, the startup has seen an uptake in requests for its services from crypto firms. Charles Roberts, who heads up its financial services team, identifies two dominant drivers: fraud prevention and regulation.

Fraudsters have been creative in finding new ways to get away with forgery and identity theft, putting crypto firms under pressure to protect the credibility of their platforms and show customers that they care about the security of their funds and data. Roberts believes the human element of video authentication services is crucial to fraud prevention, because talking with the person allows firms to better assess their credibility.

Regulatory changes and AML5

In 2018, the European Commission published the new Anti-Money Laundering Directive (AML5), which amended and was built upon AML4. The deadline for EU member states to incorporate AML5 provisions into national law was January 10, 2020. The new Directive extends to virtual currencies and includes updates on know your customer (KYC) procedures.

Roberts explains that, from the beginning of this year, cryptocurrency exchanges and wallet providers need to comply with local AML regulations and perform their own due diligence, or KYC, on their customers. Voluntary AML and countering the financing of terrorism (CFT) has been turned into a mandatory regulatory measure.

Both Roberts and Chen acknowledge the necessity of regulatory changes and the benefits of AML5 for crypto firms and their customers. Working for a crypto exchange herself, Chen believes that ‘regulating provides better legal certainty for us as a crypto business, on the one side, but also for customers, as they will know whether this firm is legitimate or not’.

However, there’s a lack of mutual licence recognition and universal national implementation of this new regulatory framework, which, as Chen says, ‘could cause legal uncertainty for crypto-asset businesses’.

Some countries, including Germany, are enforcing their own crypto regulations on top of EU ones. In the past, if you were a UK-based crypto business, regulated by the Financial Conduct Authority (FCA), and wanted to expand your services to Germany, you could simply passport the FCA regulations. Now, however, if you want to trade in Germany, the national financial authority, BaFin, requires foreign exchanges to obtain a local licence as well.

Moreover, you can run into different regulatory approaches within the same country, working for different companies. Some of them have a higher risk threshold than others so, as a third-party service provider, you need to adjust to these requirements.

The European Commission has already introduced a draft proposal for a new comprehensive framework, to be  implemented by 2024, which would encompass crypto assets that haven’t been covered under AML5, such as utility tokens, asset reference tokens, central bank digital currencies (CBDCs) and stablecoins. Recognising the challenge, Chen and Roberts remain optimistic that we can expect a single licensing regime by 2024.

Video authentication

It’s one thing being diligent about who you’re onboarding and trading with – it’s another making sure those screening processes don’t impede legitimate user journeys so much that they end up abandoning the platform. It’s the old simplicity/risk conundrum.

Roberts and the IDnow team believe video is the best identity verification method for crypto exchanges right now.

The benefits, he says, are numerous. Firstly, clients take comfort from having a human agent who guides them through the process. Previously, crypto platforms relied on their customers’ tech literacy, which could prove really challenging at times. Now, less tech-knowledgeable clients will get the support they need.

IDnow agents have control over users’ devices and can turn their camera around to scan the document properly, and turn the flash on if needed, instead of relying on the users’ environment. This method is more secure because the agent can notice if the client is reading a script or following someone else’s instructions. Video authentication might feel alien to the UK market but in Germany, Roberts says, it’s already second nature.

“Customers expect to go through a video verification call to open an account, and to transact.”

Recently, IDnow has been working closely with a number of clients from the UK and Ireland, from small businesses to banks, and, since video onboarding isn’t mandatory in the UK, IDnow can provide them with a hybrid version that combines artificial intelligence (AI)-automated procedure with a video call.

Wirex, Chen says, is using video chats only for suspicious onboarding or high-volume transactions.

“Usually, we would use it to verify that the customer is really the customer, via Zoom, Skype, WhatsApp or Google Hangouts, and we would ask additional questions when we’re onboarding them.”

She explains that video onboarding isn’t mandatory at Wirex because the procedure is more time-consuming and requires a good Wi-Fi connection, and the full-time assistance of a customer agent.

Roberts says IDnow has received more requests for video-based authentication as part of enhanced due diligence for high-volume transactions. Crypto exchanges typically use AI to verify users’ identity when they register for an account, and require video authentication when they pass a certain transaction threshold.

Roberts again emphasises the role of the customer agent as a moderator in solving problems, for example suggesting the client switches to 4G on their phone, which in most cases immediately improves the connection. A lot of these platforms and companies, not to mention the banks, already have a fully-fledged call  centre infrastructure or back-office compliance teams that can jump in for the video ID verification (IDV). IDnow also deploys its own call centre agents for its as-a-service product.

Cooperation leads the way

We can’t neglect the overwhelming changes in our relationship with technology that have been triggered over the past few months. We’ve been forced to transfer a lot of our daily tasks online, and to work and study remotely, so it’s only logical to ask what the new normal would be for identity verification services.

Wirex has transacted around $4billion, so as a crypto-native, operating across multiple regulatory jurisdictions. Its view on what works and what needs to be done to strengthen IDV carries weight – Chen clearly thinks harmonised regulation and biometrics are the way forward, as well as further cooperation between fintechs and solution providers. Wirex has itself established great communication with its third-party provider, which provides feedback, creative ideas and information on any new fraud patterns it has detected.

According to Chen, the recipe for a trustworthy IDV service provider is a combination of quality; regulatory compliance (with a focus on the EU); a straightforward, user-friendly procedure, and an openness to considering the platform’s feedback.

Roberts would agree with that, but adds that, in the short-term at least, ‘businesses that have had to close their doors are going to be looking for an alternative onboarding method, and video-based is probably the next step for them to look at, in terms of verification online’.

This article was published in The Paytech Magazine #07, Page 89-90