26 Feb 2021

Compliance Challenges for VASPs and Automated KYC Solutions

Ever since the Financial Action Task Force (FATF) expanded its list of Recommendations to include Virtual Asset Service Providers (VASPs) in June 2019, compliance with global financial regulations has become a central consideration - and challenge - for crypto companies and exchanges around the world. 

While the complexities and variations in different jurisdictions’ regulatory frameworks governing VASPs are extensive, the general view and trajectory is clear: greater regulation of the financial industry - including crypto companies - is viewed as essential in the fight against money laundering, illicit financial activities and terrorist financing. 

As a result of these regulatory evolutions, VASPs now need to have robust Know Your Customer (KYC) and compliance protocols in place as part of a comprehensive Anti-Money Laundering (AML) strategy - if they want to keep clear of the regulatory axe. Indeed, failure to comply with regulations governing transactions that take place in or through a given jurisdiction can eventually result in debilitating fines or even criminal prosecution. 

For a fledgling crypto business with limited capital, this can potentially be fatal to their business.

The problem is, compliance is not just complicated - it’s expensive. 

A recent study by risk analysis group LexisNexis found that FIs around the world spent a total of around $180 billion on compliance with global AML laws. Another 2020 report by Thomson Reuters found that more than half of Financial Institutions surveyed also expected their compliance costs to rise in the coming years. 

Along with expanding regulations, the main reason for ballooning compliance budgets is that FIs and VASPs are addressing the challenge by growing and training their human compliance teams. 

Large FIs, which tend to be saddled by legacy technology and techniques, tend to employ human compliance teams as the primary approach for addressing their compliance challenges. Despite the costs involved, FIs can also usually afford them. 

But for smaller VASPs struggling to gain a foothold in the global economy, hiring a large team of compliance and/or legal professionals might not be possible, or even necessary. Automated KYC technology can help many early-stage VASPs such as crypto companies, exchanges or ICO-issuers remain compliant with relevant regulations while keeping compliance costs low. 

Let’s take a look at some of the compliance challenges VASPs can face, and how they can be overcome through KYC-Chain’s automated compliance technology:

Challenge 1 - Startups usually have low onboarding volumes to begin with, which grow in tandem with the business.

Solution - Checks can at first be carried out with semi-automated processes, then when volumes increase the process can be further automated by using Risk Scoring/Automation.

KYC-Chain also offers tiered pricing to reduce ongoing costs for high volume growth. We can also provide a white-labelled frontend to help collect user data and documents, which can help save resources for exchanges seeking to develop their own frontend UI.

 

Challenge 2 - New rules and regulations such as the Travel Rule & AML5 directive mean exchanges have to pivot quickly to comply with new workflow and regulatory requirements.

Solution - KYC-Chain has preemptively developed solutions that allow our clients to stay ahead of these changing regulatory challenges. For the Travel Rule, we have designed a Travel Hub solution to help exchanges become compliant.

 

Challenge 3 - Exchanges may begin operations by just onboarding one specific type of user, such as retail customers. As their model and clientele type can change as their business grows, exchanges may later decide that they want to onboard institutional and corporate clients too. This means the exchange will need to expend additional time and resources finding new corporate KYC-focused compliance providers, and to adopt - and navigate - several service agreements.

Solution - The KYC-Chain platform is designed to be an integrated, one-stop solution, which means different KYC modules can be added as required in order to meet the requirements of each client's specific onboarding processes. This means our clients only need to hold one service agreement with KYC-Chain, which allows all of the different KYC features we offer to be handled and managed from through our platform.

Are you looking for ways to optimize your compliance processes while reducing costs? Get in touch and we’ll be happy to discuss how your company can use KYC-Chain to scale and grow your business.

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