Three decades ago, in the early 90s, organized criminal organizations, drug cartels, and various illegal actors needed ways to enter their illegally-obtained cash into federal fiat-currency financial systems legally. The simplest way was to open various accounts under multiple names and have one designated operator orchestrate the full operation. To make this significantly more difficult, the US government introduced Know Your Customer (KYC) regulations– a failsafe to ensure that the person a banker was speaking with was who they claimed to be. In practice, new banking customers had to present various documents, set forth by their local regulatory body, to open an account in their own name. In addition, it made it difficult for fraudsters using forged documentation to go from bank to bank physically. 

The fraudster then leverages the legitimacy of the KYC verification to make another transaction. With each transaction, it achieves more legitimacy, and of course, more profit for the fraudster until the fraud is discovered and shut down. For the account holder who was manipulated and was unaware of the takeover, there is a surprising discovery of credit card charges which, of course, will be disputed and charged back. Similarly, the “crypto mules'' will pretend they were unaware of a takeover and do the same. In either scenario, the result is the issuing FIAT bank will withdraw the funds from the merchant, who in this case is the cryptocurrency exchange, and will pay back the account holders (i.e., both the legitimate and illegitimate ones). Below are some examples of how these accounts get solicited on the dark web.

1. The ease of opening accounts and wallets online, instead of physically traveling to bank branches, makes this illegal act scaleable.

2. Not only do they never need to meet a banking representative face to face, but they also don’t need to be in the same country. It is cost-effective, and they can spoof an IP address as an alibi. If they are ever questioned, they can say it wasn’t them, and their information was stolen. While their account may be automatically closed, their name remains clean.

This harsh reality requires these cryptocurrency marketplaces not only to regulate transactions and ensure their platform operates appropriately for users and regulators, but also forces them to become risk analysts. Without being able to fully trust any account, friction is added to all users, potentially pushing account holders to another crypto platform, should they be forced to jump through too many hurdles. This is very costly to any business. Our own data shows a 25% abandon rate when there is friction from KYC requirements. A more formal study of 1,000 consumers, identifies a risk to as many as 96% of customers when friction or bad service is at play. 

The trust cryptocurrency organizations put in KYC-verified accounts can quickly backfire if they don't have other security solutions surrounding them. Whenever a business is declining, for example, 20% of its total traffic because of fraud concerns, it's a red flag that revenue will be lost. Unless the right mechanisms are in place to quickly call out what is actual fraud in that group, they'll miss out on optimizing for the actual fraud -- which is likely only 2% (not 20%) of that traffic.

No business, much less one that is in a challenging industry with a large spotlight on trust, wants to get hit with high chargeback costs or worse, shut out of 18% of revenue. The good news is that, whether KYC-verified or not, digital AI-powered behavioral analytics not only prevents fraud but also ensures results that deliver incremental revenue to the business. Recent leaps in machine learning technology allow organizations of all sizes to access AI-driven systems that identify scalable fraud in real-time and make it very difficult for fraudsters to return. By creating a space that is unwelcome for fraudsters and one that confidently approves real customers, companies can not only avoid chargebacks but also boost approval rates to as high as 95%. More customers mean more revenue, and less fraud means more trust.