Most Africa-based Virtual Asset Service Providers (VASPs), notably cryptocurrency exchanges, are vulnerable to money laundering practices due to lapses in their Know Your Customer (KYC) protocols, according to a new study by CipherTrace.

Experts explain that KYC processes help to confirm customers' identity, including the collection and verification of information like government-issued ID and traceable addresses, to prevent money laundering.

In its 2020 Geographic Risk Report: VASP KYC by Jurisdiction, CipherTrace, which helps cryptocurrency companies and financial institutions in the blockchain economy mitigate against security and compliance risks, finds that 72% of VASPs in Africa are registered in the Seychelles and 70% of them have weak or porous KYC protocols.

It follows an analysis of over 800 VASPs in over 80 countries to geographically locate where weak KYC could be exploited by money launderers, criminals, and extremists.

56% of VASPs globally have weak or porous KYC processes and many countries continue to host VASPs with deficient KYC despite existing crypto AML regulations, it says.

An excerpt from the report reads: “Fully 75% of all of Africa’s KYC deficient VASPs, then, are domiciled in the Seychelles, making the small island country a boon for potential money launderers. Further analysis shows that a majority of the customer base for Seychelles-domiciled VASPs are foreign users, highlighting their money laundering potential.”

The report comes as the price of Bitcoin climbs over US$18,000 to reach a three-year high - at US$17,180 as at this writing - and a new poll from around the world, including in Africa, suggests that three-quarters of high net worth individuals plan to invest in cryptocurrencies before the end of 2022.

The DeVere Group finds that 73% of its poll’s 700-plus respondents - a jump of 5% year-on-year to the 68% that took the same poll last year - are now already invested in- or will invest in digital currencies such as Bitcoin, Ethereum and XRP in two years.

While CipherTrace maintains that money launderers are more likely to use VASPs in Africa that have minimal to no KYC, Suyash Sumaroo, co-founder of Horizon Africa Blockchain and founder of Codevigor, believes KYC deficiency cuts across the board and not unique to the crypto space.

"The current KYC system actually promotes such practices. This is not something which is limited to virtual assets service providers or crypto exchanges,” said Sumaroo. “These sorts of malpractices have been plaguing the traditional banking sector for a long time, as shown by the recent FinCEN scandal. The current KYC protocols are used more as a system of control and surveillance than as a tool to fight money laundering.”

“With cryptocurrencies as an alternative to the current flawed fiat currency model and exchanges a temporary mechanism for distributing them, activities which partially or completely overlook the use of outdated KYC protocols are bound to happen,” he added.

“What is more interesting is to have decentralised KYC systems which provide a more robust, secure and surveillance-resistant system."