Onfido is encouraging cryptocurrency exchanges to adopt secure identification technology. In doing so, the company called attention to the recent story of Stefan Thomas, who has $220 million worth of Bitcoin stored on an IronKey that will be lost forever if he cannot guess the password in his next two tries.
With that in mind, Onfido noted that the same features that make cryptocurrencies so appealing can have a profoundly negative impact on their overall utility. For example, many people turned to Bitcoin precisely because it exists outside of the traditional banking system. Anyone can sign up for an account without going through a lengthy identification process, which in theory makes the currency more accessible.
The downside, however, is that that framework essentially forces each individual user to act as their own bank, since there is no centralized authority to help maintain the system. That means that regular people become responsible for things that would normally be handled by professionals, which can create problems if those people are not up to the task.
That’s especially true with regards to security. Since there is no customer service, Bitcoin owners do not have any way to reset a password or recover an account that has been lost or stolen. As a stands, Onfido estimates that 20 percent of all Bitcoin (worth around $140 billion) is now completely inaccessible, either because it is lost or it is locked in inaccessible wallets like Thomas’ IronKey, which has no recovery mechanism.
The fact that cryptocurrencies do not require proof of identity also makes them popular with cybercriminals. According to Onfido, cryptocurrency exchanges were used to launder $2.8 billion in 2019, a figure that is attracting the scrutiny of governments and international regulators. If cryptocurrencies do not find a way to address that problem, legislators could pass laws in an effort to bring the system under their control.
While there is some oversight for centralized exchanges that allow users to trade cryptocurrencies for official fiat currencies, the majority (81 percent) of the decentralized peer-to-peer exchanges have either weak Know Your Customer procedures or none at all. Onfido suggests that exchanges should be trying to address that problem, with KYC and anti-money laundering features that build trust and improve the user experience for everyday consumers. Doing so could eliminate some of cryptocurrency’s original appeal, but it would also satisfy regulators and attract new users if it makes people feel more comfortable with cryptocurrency exchanges.
Onfido, of course, is a leading developer of remote identity verification technology. The company has provided biometric onboarding capabilities for several cryptocurrency companies, with Hodlnaut and LocalBitcoins standing as the latest additions to its client roster.