Are crypto exchanges whitewashing compliance with KYC bonuses?

Unlike banks, which require know-your-customer (KYC) information prior to opening an account, a significant number of crypto exchanges offer tether (USDT) bonuses for submitting KYC information like name, address, ID card, and contact information.

To be clear, these KYC bonuses are not account opening bonuses. In many cases, crypto exchanges allow customers to open small accounts and trade without submitting any KYC information. Moreover, the tether bonus doesn’t require any bank-like task, such as signing up for direct deposit or holding a large initial balance. Rather, this tether bonus is simply for submitting a valid ID card.

Therefore, although it’s commonplace for banks to offer an account opening bonus for customers who complete significant banking tasks, US banks typically do not pay anything for simply opening an account and submitting an ID card.

Moreover, a US bank may not open an account without an ID card; KYC documentation is federally mandated. Similarly, money transmitters like MoneyGram, PayPal, Venmo, and CashApp require KYC documentation prior to sending money, and they don’t pay anything for completing KYC.

Nevertheless, crypto exchanges are happy to pay customers KYC bonuses.

  • Binance is paying some customers three USDT to pass KYC.
  • BTCC is paying 20 USDT and specifically targets US residents.
  • MEXC is paying 20 USDT.
Many KYC bonus offers are in foreign languages.

USDT bonuses for submitting an ID

USDT payouts are curious for two reasons. First, exchanges consistently denominate payouts in tether more than any other stablecoin, which raises questions about whether the stablecoin’s issuer, market-makers trading USDT, or some other entities are somehow involved in the promotions.

Unfortunately, this type of skepticism is warranted, as crypto exchange operators have a long history of trading against their own customers — especially on USDT trading pairs.

If the bonus is simply a way to attract new customers to trade USDT and slowly give it all back (and often more) to sophisticated quants or market-makers, paying up to 20 USDT for a steady stream of new losers is a rational economic decision.

Second, it’s concerning that many crypto exchanges, which almost always must register as a money transmitter, don’t mandate KYC in the first place. Banks and registered money transmitters don’t pay customers for KYC; they simply require it.

Notice to crypto exchanges about their registration requirements for money transmission is frequent and obvious. Last month, the US Department of Justice indicted the cofounders of Samourai Wallet, repeatedly admonishing them for ignoring the obvious notices from the Finance Crimes Enforcement Network (FinCEN), Financial Action Task Force (FATF), the Federal Bureau of Investigation (FBI), and a variety of other government agencies. Similar indictments have charged criminals for ignoring the laws of money transmission for decades.

Read more: The history of crypto exchanges trading against their own customers

Money transmission businesses must KYC their customers

Specifically, it is a crime to operate an unlicensed money-transmitting service serving US customers per Federal statute 18 U.S.C. § 1960. This statute defines money transmitting as ‘transferring funds on behalf of the public by any and all means.’

The Bank Secrecy Act (BSA) 31 U.S.C § 5330 defines a money transmitting service as ‘accepting currency, funds, or value that substitutes for currency and transmitting the currency, funds, or value that substitutes for currency by any means.’ Section 5330 also clarifies that a money transmitting service includes ‘any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system.’

(All statutes above provide some exceptions to Network Access Service Providers like telecoms and couriers that indiscriminately facilitate access to a broad network.)

If anyone is in the business of accepting and transmitting money on behalf of US residents, they probably have to register as a money transmitter. In other words, this isn’t something that a business owner should give customers the option to complete with a USDT bonus. On the contrary, it’s a requirement before allowing any customer to transmit money.

However, many crypto exchanges claim to not be money transmitters because, for example, public blockchains like Ethereum are broad networks and, they say, the crypto exchange merely facilitates access as a network access service provider. This is one of their arguments, at least.

In this view, because they are simply facilitating customers’ access to a broad network, they don’t need to register as a money transmitter and, therefore, don’t need to complete KYC checks prior to customers initiating payments.

Read more: Sources confirm Binance helps users avoid KYC/AML

KYC bonuses for compliance

Perhaps, a final option might be that the crypto exchange is simply whitewashing its efforts at compliance. Many of these USDT bonuses for KYC are hidden in foreign languages, time-sensitive offer webpages, geofenced advertisements, or ephemeral social media posts. These giveaways might simply increase the number of KYC checks during key periods, such as the end of a fiscal year, for a crypto exchange looking to boost its compliance numbers during annual reports, or occasional surveillance check-ins with law enforcement. 

In the end, it’s impossible to know exactly why crypto exchanges are paying for the basic task of KYC. Not only is it a requirement of US money transmission services (if crypto exchanges are, indeed, money transmitters), but it’s never a compensated task by traditional financial companies like banks, PayPal, Zelle, MoneyGram, or Venmo. For some reason, crypto exchanges are willing to pay customers up to 20 USDT to submit their ID. It’s certainly suspicious.

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About the Author: Daniel