Cryptocurrencies, like Bitcoin (BTC) and Ether (ETH), have become popular financial assets. At least 16% of Americans already hold cryptocurrencies, and this percentage is expected to grow exponentially.
Compared with traditional currencies and securities, like stocks and bonds, cryptocurrencies have had a record high rate of returns, triggering a global boom in crypto investments by both major financial institutions and day traders. However, as a new and unregulated form of currency they come with higher risks, in terms of price volatility and fraudulent activity, which has led to growing attention from regulators around the globe.
One of the most common forms of identity verification is Know Your Customer (KYC). KYC helps financial institutions avoid fraudulent activity by confirming customer identity. Most major cryptocurrency exchanges currently have KYC processes to ensure they are not liable if illegal activity occurs on their platform. However, there are existing weaknesses in KYC that can be easily improved upon with the assistance of Artificial Intelligence (AI).
This article provides an introduction to cryptocurrency and eKYC, as well as detailing how cryptocurrency exchanges can use AI technologies, such as facial recognition KYC technology, to comply with regulations and improve user experience.
Cryptocurrency is a digital currency that operates on blockchain technology. Thanks to this structure, the cryptocurrency market doesn’t close each day like the stock market. Instead, these assets can be traded at any time.
Transactions take place through the connection of multiple encrypted blockchains. Blockchain ledgers use distributed ledger technology (DLT), which means that the transaction history is spread across all users computers and stored simultaneously and synchronously. This measure makes the blockchain tamper-proof.
Fiat currencies, like the U.S. Dollar and the Euro, are issued by a country’s government with the currency market determining value and exchange rate. Cryptocurrencies, however, are not legal tender issued by governments or central banks. They are decentralized currency that store information in the blockchain through computer-generated passwords.
Cryptocurrencies are also issued in limited amounts. Looking at Bitcoin as an example, 17 million Bitcoins have been “mined” since its inception in 2009. With new Bitcoins mined every hour, output speed will decrease until total circulation reaches its upper limit of 21 million in 2140. Additionally, user supply and demand determine the consensus-based value of cryptocurrency.
In terms of U.S. dollars, the value of one Bitcoin grew dramatically in 2021, from $20,000 in January to $68,000 in November, before dropping to $44,000 in February 2022. This extreme volatility and potential for rapid growth and quick returns has attracted many new retail investors to the market.
Cryptocurrency transactions occur through three main channels: exchanges, trading platforms, and over the counter (OTC).
An exchange provides the exchange rate or price of fiat currency and cryptocurrency. Users directly exchange cryptocurrency on the platform by remitting dollars and storing exchanged currency in a cryptocurrency wallet. Highly rated crypto exchanges available in the U.S. include Coinbase, Binance, Robinhood, Gemini, and Kraken.
Exchanges do not use real-time exchange rates, so there may be a gap between visible prices and current market prices. However, the advantage is that trades do not need matching and can be executed immediately. Nevertheless, many disadvantages also exist, including fewer currencies available for trading and the inability to use currency to purchase other currency.
Exchange services often create trading platforms for private institutions and companies to buy and sell crypto. After users register as members of the exchange they must complete identity authentication before conducting transactions on the platform.
One advantage of these trading platforms is that they’re more flexible than pure exchanges. They also allow users to exchange different cryptocurrencies. Furthermore, they use real-time quotes, so prices are closer to actual market prices.
This refers to person-to-person (P2P) private transactions between cryptocurrency users or through exchanges that support OTC services.
KYC, which stands for “Know Your Customer,” is an account review method using personal information and credentials to confirm one’s identity. KYC is a regulatory obligation for many large financial institutions and services to aid in the prevention of illegal activities.
eKYC stands for “Electronic Know Your Customer.” Unlike KYC processes, which require complicated procedures, in-person applications, and lengthy paperwork, the entire eKYC process is completed electronically. eKYC empowers financial applications by securing mobile banking and payment services, and enabling insurance policy contracts and bank accounts to be opened remotely.
eKYC significantly simplifies the process of opening accounts for applicants remotely. Applicants can use AI image recognition to authenticate their ID cards with their faces. AI-based facial recognition also allows users to log in securely without the need to enter long, complex passwords.
All major cryptocurrency platforms include an identity verification process to protect against fraud. This can include uploading multiple identity documents, and confirming personal details. eKYC, through facial recognition, simplifies this process by providing rapid identity verification.
In June of 2021, Taiwanese cryptocurrency trading platform BitoEX deployed an identification process to comply with new Taiwanese laws mandating KYC for cryptocurrency platforms. Their process included having users upload images of the front and back of their ID cards, as well as a selfie of them holding their ID, to complete verification. This process led to several difficulties, including:
During this process, the user must write down the account registration date and name of the exchange on a piece of white paper, sign the document, take a selfie while holding up both the paper and ID, and finally upload the selfie. This step discourages many users from proceeding with registration.
Users sometimes need to manually fill in information from their ID card, such as their name, ID number, date of issue, and address. In addition to spending unnecessary time filling in information manually, it’s also easy to make an error.
Reviewers must carefully examine identity verifications for authenticity by visually confirming that the ID belongs to the applicant, which is another place of potential error.
To solve the problems that arose after implementing KYC authentication, BitoEX collaborated with CyberLink, developer of AI facial recognition. CyberLink’s solution, FaceMe® eKYC & Fintech, uses AI technology to accelerate the user application process. The solution includes the following:
During the application process, the user authenticates their identity by using the camera on their mobile phone to scan the front and back of the ID card. FaceMe eKYC’s AI recognition also identifies numerous security features of the ID card upon authentication.
FaceMe detects whether the person in front of the lens is real or not, preventing people from using photos and/or videos of an individual to commit identity fraud.
FaceMe uses AI technology to confirm that the photo on the ID card and the applicant in front of the camera are the same person.
After completing identity verification, applicants can use Optical Character Recognition (OCR) technology to pull information such as their name, ID number, date of issue, and address from the ID card. FaceMe then automatically fills in the application form, avoiding the hassle of typing it in manually.
Through FaceMe facial recognition technology, BitoEX users now have a fully automated authentication process, and reviewers only need to perform a final confirmation. FaceMe can dramatically shorten the authentication process from ten days to one. Users can also use facial recognition to log in to the service and conduct transactions, saving the trouble of entering passwords and improving efficiency.
CyberLink has integrated AI, facial recognition, and video conferencing technology into FaceMe® eKYC & Fintech, a complete solution designed for banking, financial services, and insurance (BFSI). The solution provides a variety of eKYC software development kits (SDKs) that can integrate into any remote insurance application or account opening process, including facial recognition, liveness detection, identity card authentication, comparison of a person against identification, and document verification.
FaceMe eKYC also provides a videoconferencing SDK to assist in building remote videoconferencing services through private or public cloud services. SDKs for iOS and Android are also available, allowing integration with a company’s mobile app, to allow recordings during application processes for auditing and compliance with financial service regulations.
You can read our in-depth report about introducing eKYC facial recognition solutions with liveness detection to fintech applications. You can also visit the FaceMe® eKYC & Fintech website to learn more about specific solutions designed for financial applications.