Insurance on Crypto Exchanges Inches Up, KYC Still Weak – Report

Cryptocurrency exchanges are showing an increase in their tendency to insure clients’ assets, both formally and in informal ways through insurance funds, a new report finds. On the other hand, know-your-customer (KYC) stringency is still weak on many exchanges, with around a third having poor or inadequate KYC programs, and a fourth of them were found to send funds to higher risk entities. Overall, there was an increase in the market share of top-tier exchanges compared to half a year ago, thanks to the lower risk they pose to both retail and institutional investors.

The report by crypto market data provider CryptoCompare currently assesses more than 150 exchanges across 8 categories.

It shows that, when it comes to keeping users’ funds secure, a tenth of the rated exchanges offer some form of insurance—up by a mere 1% in the past six months.

An additional 9% offer informal insurance through an insurance fund, which is a significant increase from the 3% in February 2021.

The data provider also added,

“25% of exchanges were found to send funds to higher risk entities for more than 4% (High Risk Range) of transactions according to [blockchain analytics company] CipherTrace vs 28% in Feb 2021.”

The report further shows an increase in Top-Tier exchanges according to their criteria: out of more than 150 global spot exchanges that were rated, 87 of them met the threshold for Top-Tier status in August 2021, compared to 84 in February this year.

However, only nine exchanges have qualified for AA-A status (as opposed to 24 in February), as the provider has tightened the requirements by creating minimum thresholds within certain categories. Due to this, exchanges that meet the total score threshold for AA-A status but do not meet the threshold in each individual category receive a BB grade.

Six exchanges received the “lowest risk” honor: Coinbase, Gemini, Bitstamp, Kraken, itBit, and CrossTower, all have AA ratings on CryptoCompare.

These exchanges also tend to be most commonly used in the crypto industry by both retail investors and professional traders thanks to this: they now make up 89% of the market share, compared to 85% in February.

However, 34% of exchanges have poor or inadequate KYC programs (compared to 33% in February), but this is still lower than the 44% of them that were detected in July 2020.

While there has been a change towards more stringent KYC requirements on a year-on-year basis, it has not changed noticeably in the past half year, the report concluded.

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