If there’s one trait that most business executives share, it’s a love of predictability. Volatility is an enemy of most banking professionals, but they sure have their share of it these days. And it used to be a sworn enemy of stockbrokers, but the recent Reddit GameStop drama and the emergence of special purpose acquisition companies (SPACs) has put their world on a high wire. And we haven’t even mentioned bitcoin, which is currently trading above $50,000.
The trouble with things like the GameStop explosion and bitcoin’s recent surge, Karen Webster said in a conversation with Trulioo Chief Operating Officer Zac Cohen, is that although apps and zero-cost trades may have democratized access to the stock market for retail traders, it has not necessarily democratized access to the tools that these investors might need to make well-informed investment decisions. In fact, it may not even be clear that they’re making investment decisions at all, but rather making daily bets on a stock’s rise or fall based on the wisdom (or not) of the crowds.
It’s a situation that has begun to worry regulators and legislators.
“The regulator’s job is to create safe environments and to ensure that there are satisfactory controls in place such that individuals can participate of their own free will, but only when it’s appropriate,” Cohen said. “It’s a tough job because it’s not easy to determine the rules of the game for the most part.”
Cohen explained that recent events have spurred the realization that new use cases for digital identity verification are emerging. That no one foresaw it, he said, doesn’t necessarily mean there is a legislative or regulatory issue. But what the current situation does point out is an opportunity for platforms of all kinds to begin collaborating and working with their regulatory and legislative bodies and understanding the direction they are looking for them to go in.
And this, he said, will ultimately be a positive step forward for the commerce ecosystem as a whole because it will ultimately mean taking a better look at verification processes, monitoring processes and building risk-based approaches to their user groups that will be able to push back the changes of fraud or misuse without infringing or restricting participation.
KYC As A Continuous Journey
Among the issues exposed by the GameStop event is that people were investing via Robinhood who should not have been legally allowed to do so because they were under 18. And while some adults may have intentionally set up accounts for their kids under their names — to give their children a first-hand education in investing — they did so in violation of the rules that prevent underage investing.
He said that this isn’t an issue in the physical world — no one attempts to sneak a kid into a horse track and send him to the window to make a big bet. The online world, however, makes that easy eyeball check largely impossible.
“That means we have to go a little bit further in the spectrum to not only confirm that this is a real person on the other side, but that it is the right person holding that information,” Cohen said. “And so it’s really a two-stage process that can be done very smoothly but has to be thought about strategically by these ecosystems and these market participants.”
That process means understanding that “knowing your customer” is highly meaningful in places other than the onboarding process. It takes commitment and a long-term evaluation of whether financial activity is well-intentioned and if it is the same user that signed up initially. Know your customer (KYC) is about building a holistic profile over the course of the relationship, he said.
“And that will help answer the big questions: Is this activity normal?” Cohen said. “Are they behaving in a similar way as they have in the past? Have they crossed a certain threshold that should require further validation?”
Platforms of all kinds, he said, are doing the work of building these smarter environments right now. Because being proactive, as opposed to waiting for the regulators to take an active interest and start making demands, is a smarter way to play.
The Push Toward Proactivity
Among the encouraging developments for crypto platforms Trulioo has worked with in recent months, Cohen said, is the degree to which they’ve been upgrading their platforms to increase trust and safety online.
What they’ve seen, he said, is that it’s a good idea to take “a first-mover approach” to encourage safe activities.
Something similar has been at work, he said, in how social media platforms have moved to regulate and control advertisers on their platforms.
“At the end of the day, we’re not trying to stop participation. We’re trying to model activity and protect the ecosystem,” Cohen said.
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