India needs a robust KYC to prevent crypto fraud

All eyes were glued to the TV, YouTube Channel, and PIB Twitter channel when our finance minister Nirmala Sitharaman announced the budget for 2022. Usually, people are interested in budget announcements for an income tax rebate or a subsidy. But this budget was different, or rather unique as it was the first time the Indian government was going to say something about cryptocurrency.  

And they did! A flat 30% tax on all virtual digital assets including cryptocurrency and NFTs. Surprisingly, cryptocurrency exchanges in India saw a 59% jump in signups soon after the budget – a completely opposite reaction of what everyone would expect. India’s tax policy on crypto wasn’t just welcomed, it was celebrated.  

An urgent need to prevent Crypto frauds

Cryptocurrency has seen a meteoric rise in India ever since the Reserve Bank of India overturned the ban in 2020. In a matter of a few months since the decision, India became an emerging hotspot of decentralized finance. A whopping 20 million users entered the crypto market in 2021 alone. To give a view, investments in crypto increased from $923 million in April 2020 to $6.6 billion in May 2021. Most of the boom can be attributed to the growing interest of youth, particularly those between the ages of 18 and 35.  

What followed this cryptocurrency frenzy was a rise in crypto fraud. In some instances, hackers have been stealing crypto and selling them via platforms with no or minimal KYC checks. This gives very little information to trace the identity of the hackers. 

India's nascent crypto market is slowly becoming a target for sophisticated cybercrimes. A primary reason behind this is that crypto transaction if performed without KYC, are quite challenging to trace. Moreover, crypto frauds can also lead to other cybercrime activities such as identity fraud or ransomware attacks. As India’s crypto market evolves and takes a firm stand, it is important to build an ecosystem that supports a robust KYC.  

The Reserve Bank of India mandates that regulated firms adhere to KYC/AML/CFT norms - which becomes critical as cryptocurrency volumes are increasing significantly. 

Mandating the KYC for crypto agencies

Know Your Customer (KYC) or Know Your Client is a process where financial institutions verify their customer’s identifying information to prevent illegal activities. The activities that KYC aims to prevent can be anti-money laundering, cybercrime, fraud, terrorist financing laws. It ensures that customers aren’t financing terrorism, dealing with black money, or being involved in shady or fraudulent schemes. 

While it is mandatory for banks and financial institutions to have a KYC process in place, these requirements aren’t applicable to decentralized exchanges (DEXs), wallets, and protocols. That means crypto traders aren’t necessarily required to disclose their identities. Most DEXs are only providing the infrastructure for P2P transactions and may not be able to track P2P transactions that can potentially be fraudulent.  

With their huge volumes and lack of KYC checks, DEXs have become an obvious choice for money laundering in crypto. 

The magic of Single KYC API

Several exchanges, including Binance, CoinDCX, scrutinize their customers through a strict KYC process. They may ask users to click live pictures, submit government-issued identification to prevent fraud.  

However, as crypto sees an exponential rise, there’s an urgent need to leverage platforms that can help crypto agencies leverage a robust KYC process. With a single KYC API, these exchanges can run multiple checks, and extract the authentic background details from the respective national databases. Many crypto exchanges have deployed a strict KYC policy and combat fraud leveraging a single KYC integration for multiple data points.  

Enforcing KYC compliance can not only help prevent malicious activity but also protect consumer privacy. Stronger crypto compliance, consisting of a robust identification procedure could help crypto agencies protect consumer interest.  

Rohit Taneja

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Rohit Taneja is the Founder and CEO at Decentro.