To Serve and Protect: How Nexo’s KYC and AML controls work

There is a lot that distinguishes Nexo in the digital assets space. Ultimately, it is our dedicated approach to safeguarding our platform and clients through uncompromising risk management that has brought us to a leading position in the industry.

It is also the fact that we have been able to secure numerous licenses and registrations across the globe, as well as ​​design and enforce one of the most rigorous Anti-Money Laundering and Counter-Terrorist Financing (“AML/CTF”) compliance programs in the industry.

This vision to assist cryptocurrency adoption, while upholding full and uncompromising compliance with KYC and AML regulatory requirements, is what sets us apart. We hold ourselves to the highest standards and encourage others to do the same. The principles we stand for, including prudent risk management, insurance on custodial assets, and lending on an over-collateralized basis only, are non-negotiable, and our track record speaks volumes of our commitment to these principles.

We understand companies in the space suffer from the erroneous beliefs that crypto is a portal to criminal activity and facilitates illicit transactions. However, this perception is flawed and easy to disprove – Chainalysis does just that in their latest report (read on for the 2023 data).

In truth, all on-chain transfers have an audit trail and blockchain technology ensures transactions are publicly traceable. Increasingly more value is being transferred to the blockchain, which will make all risks more visible and make it easier to mitigate them.

To clear the controversy that still surrounds on-chain activity, let’s briefly look at what the numbers say.

How KYC & AML Help Prevent Crypto Crime

Recent data from Chainalysis, one of the most reputable blockchain analytics providers, shows that in 2023, the share of all crypto transaction volume associated with illicit activity fell to 0.34% from 0.42% in 2022. In dollar figures, that amount stands at just over $24 billion. For comparison, the UN Office of Drugs and Crime estimates that between $800 billion and $2 trillion of fiat currency is laundered each year. While these figures indeed provide a stark contrast, it is evident that money laundering affects virtually all forms of economic transfer.

One of the strongest ways for platforms to protect their users against hackers, money launderers, fraudsters and other bad actors on the blockchain, is to implement sound and robust Know Your Customer (“KYC”) processes. KYC is required by all regulators and is the foundation of a strong and effective AML/CTF program. It allows financial institutions to accurately assess the risk posed by customers and provide an added security layer by preventing unauthorized persons from claiming your assets, impersonating you or misusing your account. In fact, we remind crypto users to be extra vigilant and wary of any platform with laxed or non-existent KYC measures.

While compliance can be time-consuming and costly, protecting the integrity and reputation of the industry should always come as a priority. As an industry leader, this principle is embedded in our culture.

KYC and AML Mechanisms on Nexo

We’ve worked hard to achieve a superior user experience within an intuitive interface for our clients, while ensuring we continue to uphold the highest standards when it comes to our regulatory obligations. Below you can find the key steps and components of our rigorous onboarding and verification processes.

Unlike many other companies in the crypto industry that allow customers to have limited or even full access to their product suite without any checks, we do not allow users to open an account unless they are fully verified. Our verification process is supported by industry leading KYC companies. We use SumSub’s seamless verification flow which allows for easy ID verification, liveness checks, and face match, as well as address verification. We also use Jumio’s customer identity verification services, which mitigate identity theft risks via subjecting customers to ID verification, similarity check, and liveness check.

We place the utmost importance on sanctions compliance and all platform users are screened continuously against ComplyAdvantage’s comprehensive database. Not only that, but we also screen customers for PEP/Adverse Media/Regulatory Warnings or Fitness probity hits on an on-going basis. Our systems send out triggered internal alerts to our Compliance professionals for manual review whenever a user’s status is modified.

Nexo has also implemented an uncompromising Transaction Monitoring process that utilizes highly-reputable and efficient software solutions. All transactions, in both fiat and cryptocurrency, are subject to real-time automated monitoring. This allows our intelligence teams to seamlessly access and track every transaction on the Nexo platform. When it comes to monitoring on-chain transactions, Nexo partners with Chainalysis Inc. – a worldwide, leading enterprise in the field of blockchain forensic intelligence. Their services are endorsed by high-profile financial services companies, regulators, and enforcement agencies, including the United States government, the FBI, CIA, and IRS. Currently, Nexo makes use of the “Know Your Transaction” (KYT) and “Reactor” tools:

• KYT provides real-time transaction monitoring of cryptocurrency activity to identify high-risk behavior. The KYT software continuously collects data on high-risk cryptocurrency addresses.
• The Reactor allows us to visualize the flows of cryptocurrency through an unlimited number of “hops” and link suspicious activity to real-world entities, ensuring that withdrawals to high-risk cryptocurrency addresses are not authorized, and that enhanced due diligence checks are conducted on a risk-based approach basis, as necessary.

In our efforts to safeguard our customers from digital deceptions and fraudulent activities, Nexo has also partnered with Sift. Sift prevents fraud with industry-leading technology and expertise, a vast global data network, and a commitment to building long-term partnerships with their customers. Sift's Digital Trust & Safety Suite proactively prevents fraudulent payments, fake accounts, spam, scams, account takeovers, and disputes while reducing false positives and powering frictionless experiences.

Nexo also utilises Checkout's fraud detection solution, where we have deployed a wide range of automated risk rules. The solution allows applying risk scoring and routing logic to different segments and criteria. Each relevant payment is assessed against the custom rules that we have created in the Risk Strategy allowing us to mitigate fraud risk.

On-going Compliance Efforts

We’re far from thinking challenging times in crypto are behind us, quite the contrary. Never before have we, at Nexo, been more determined to push standards for security and compliance higher:

• We continue our worldwide crusade for license acquisitions, and are impatiently waiting for more clarity on crypto business models from the regulators;
• We continue to expand our RegTech suite to ensure we stay at the forefront of the developing regulatory landscape;
• We continue to hire highly qualified and trained certified AML Compliance professionals who are dedicated to ensuring the design and operating effectiveness of the AML/CTF program on a day-to-day basis;
• We continue to work together with law enforcement agencies around the world in our efforts to make the crypto space safer.

As we acknowledge fully, it is our responsibility to carry through these forming periods with business integrity, client security, and product innovation as guiding principles.

The (near) future of KYC and AML?

AML and KYC procedures will only become more complex and demanding as the digitalization of finance continues with cryptocurrencies. Artificial intelligence and machine learning have the potential to advance client processes, including risk profiling and analyzing AML transaction monitoring alerts, while at the same time reducing the need for manual interventions.

It is only a matter of time for zero-knowledge protocols to be deployed within KYC procedures, infinitely smoothing out identity verification processes and minimizing data breaches.

On top of all this, cloud-based software-as-a-service solutions will play an even bigger role in safeguarding client data. Concurrently, this will allow for further cooperation between financial institutions and regulatory enforcement agencies when it comes to data sharing to combat financial crime more effectively.

We firmly believe in blockchain technology’s liberating nature and yet, uncovering its full potential will present numerous challenges. At Nexo, we are set on leveraging technology to keep our platform compliant and our clients safe, all while embracing the revolution that digital assets bring to us.