The critical point of user growth in Crypto Assets - can the verification mechanism keep up?

Source: Cointelegraph Original Text: "The Critical Point of User Growth in Cryptocurrency - Can the Verification Mechanism Keep Up?"

Author of the viewpoint: Ilya Brovin, Chief Growth Officer of Sumsub

In the second half of 2024, the traffic to crypto platforms increased by 20%. As the use of cryptocurrencies worldwide—especially in the U.S. market—reaches new highs, the scope of institutional adoption further expands, and risks increase accordingly. Market research shows that about 10.2% of the global population has invested in cryptocurrencies in some form. In 2024, approximately 1 in every 100 users of digital platforms will be affected by fraud. This also applies to crypto platforms, meaning that around 8 million cryptocurrency holders may be involved in some form of digital fraud.

With the launch of projects such as counterfeit Trump-branded meme coins, the surge in new users has made the network of potential victims of cryptocurrency and digital fraud wider and cheaper, and more susceptible than ever due to the lack of education for many new users. With the change of U.S. government and broad-based crypto positivity, crypto interest has surged, leading to a record demand for fast and secure user registrations, ensuring that the users the platform accepts are indeed who they claim to be. Validation speed and technology are struggling to keep up with this demand. With the help of automation and AI, the verification time has increased by 46%, helping the platform to complete user registration quickly and reduce user churn, but the pass rate is still a concern.

Registration, Monitoring and Management

With the popularity of cryptocurrencies, global fraud has also increased, growing by 48%. All this new traffic has provided ample opportunities for identity fraud, particularly document forgery—the most prevalent type of fraud in the crypto industry. However, anti-fraud innovations are also continuously fighting back. Biometric checks and non-document verification have improved the success rate of registrations, notably, all countries implementing non-document verification have seen a significant increase in their pass rates.

Despite this, over 70% of fraud occurs after the registration phase. In the past, traditional verification systems relying on Know Your Customer (KYC) and registration checks were considered robust enough. However, in today's fast-paced technological advancements and the rapid adoption of cryptocurrency, verification technologies must go beyond the initial stages, remaining dynamic and adaptive. While KYC has now become a legal standard in most jurisdictions, the information typically required, such as live detection, document verification, address proof, and sanctions screening, is no longer sufficient. Merely verifying information once is inadequate to manage risks. Companies must now extend the registration process into subsequent monitoring and management phases.

Cryptocurrency platforms and enterprises must strengthen their anti-fraud and anti-money laundering (AML) efforts to support the growing number of users. To effectively combat identity fraud, companies must adopt a comprehensive prevention strategy that safeguards every aspect of the user journey. This includes implementing continuous monitoring and advanced analytical techniques to detect suspicious behavior in real-time and respond quickly before potential threats cause financial damage.

The security adaptation required for the future adoption of cryptocurrency

Industry research surveys show that the market strongly favors the use of automated third-party solutions and a combination of anti-fraud methods, with the United States and Canada leading in the use of automated third-party solutions. Manual and internal verification methods have struggled to meet the rapidly evolving needs of the cryptocurrency industry. This is because internal verification often relies on existing IT and security teams, which often lack sufficient resources to support a surge in users and are prone to missing warning signals.

The digital fraud space requires a convergence of AI, cybersecurity, and identity fraud prevention technologies. Over the past few years, cybersecurity and fraud prevention have been separate functions in the corporate structure. But to survive the crypto storm, it's essential to recognize the shift in protection needs and merge the two. As a result, it becomes critical to develop a comprehensive defense strategy, which should include features such as API inspection, digital risk protection, and AI defense to protect organizations and their users.

Win the regulatory gray area

Despite the growth in the use and popularity of cryptocurrencies, crypto asset holders and exchanges in the United States remain in a state of protective regulatory gray area. The Travel Rule aims to protect Virtual Asset Service Providers (VASPs) and decentralized finance (DeFi) platforms from money laundering and terrorist financing, and this rule has been implemented in several countries including Singapore, Canada, the UK, and the EU, serving as an important protective mechanism for many. However, currently only 29% of companies worldwide are fully compliant, with regulatory ambiguity being a major reason.

This year, we can expect governments around the world to introduce stronger government-supported verification methods, promoting stricter KYC requirements and moving towards the integration of government databases and verifiable credentials. Although paper documents will not completely disappear, VASPs can take the lead in adopting more sophisticated verification methods while supporting both traditional and digital credentials to stay at the forefront of evolving regulations. At the same time, as the new U.S. government gradually shapes its regulatory policies, businesses and platforms still need to proactively implement protective measures to ensure the safety of themselves and their users.

In the coming years, exchanges, crypto users, and VASPs clients that invest in multi-layered protection strategies (combining AI, behavioral analysis, and robust verification methods) will stand out in the continuously evolving fraud schemes. At the global regulatory level, the EU's implementation of MiCA (Markets in Crypto-Assets) is a positive step towards enforcing strict licensing and governance rules. The question is whether the pace of global regulatory rollout can keep up with the current wave of digital fraud.

Author of the viewpoint: Ilya Brovin, Chief Growth Officer of Sumsub.

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This article is for general informational purposes only and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed in this article are solely those of the author and do not necessarily reflect or represent the views and positions of Cointelegraph.