The world has drastically transformed with the emergence of unique and revolutionary technologies. The dawn of the twenty-first century has brought many opportunities for every sector to grow in digitization. Each industry attempted to combat its challenges by inventing solutions. Artificial intelligence and machine learning paved the way for immense benefits in various fields, including healthcare, fintech, finance, and law enforcement. Creating virtual spaces like metaverse introduced the concepts of augmented and virtual reality. However, it also resulted in security threats and possibilities of money laundering due to loosely regulated AR and VR spaces, including Metaverse. Therefore, KYB compliance in Metaverse is critical for fraud deterrence and AML compliance.
What Does KYB Mean?
KYB stands for know-your-business and is a mandatory business-to-business (B2B) alliance process. An organization can verify other companies, vendors, and service providers before establishing official business ties, such as partnerships and agreements. KYB compliance is critical to ensure that the other business is not suspected of illegal activities, illicit financial transfers, scams, fraud, and criminal network financing. Similarly, their records are thoroughly examined to identify any suspicious elements, such as misleading data about the source of income. The company’s legal documents are scanned and checked to detect signs of forgery or counterfeiting, such as fake tax statements, money trails, or false signatures. Hence, KYB compliance is critical for complying with financial regulations, such as anti-money laundering and counter-terrorism efforts, specifically in the post-9/11 world.
Metaverse: An Altogether Different World of Artificial Reality
Metaverse is a virtual dimension incorporating real-life sensory aspects into an entirely digital world. Using artificial intelligence-affiliated technologies, metaverse has integrated elements of virtual reality, social media, augmented reality, and crypto into one platform. It has provided a space for users to interact in an online world where they identify as their avatars. This indicates that the metaverse is an entirely new world where people interact with others and use digital currencies. Meta by Facebook is a prominent example of a Web 3.0 metaverse.
As per an estimate, the global metaverse market value is expected to reach an astonishing figure of USD 3,409 billion by 2027. Such numbers, on the one hand, emphasize the growing popularity of the metaverse. Conversely, it highlights the potential security risks that loom over this leniently regulated digital space. Therefore, it has become highly significant for the metaverse to implement kyb services for AML compliance to combat the threats of money laundering via virtual spaces.
Money Laundering Threats in Metaverse & Blockchain Technology
Gaming platforms entered as the initial users of the metaverse. Now various businesses have registered their existence in this realm. For instance, users can buy and sell properties and goods, such as non-fungible tokens (NFTs), in this virtual world using crypto assets. The entire space of the metaverse is linked to blockchain technologies. The sudden boom in this industry has led to security and user privacy challenges, a lack of transparency in investment matters, and the absence of a stringent regulatory plan. Thus, these problems have opened doors for criminals to indulge in security breaches, data theft, and money laundering.
This is why KYC and KYB compliance has become mandatory for the metaverse. The users are known by their avatars instead of authentic and legally authorized identities. Criminal entities can easily target the metaverse space by buying virtual assets in one space and selling them in another one. Therefore, such companies or their owners use numerous blockchains to disguise their activities and make surveillance much more difficult or even impossible at times. Hence, the metaverse must be brought under strict anti-money laundering regulatory standards.
Understanding NFTs and DeFi
Decentralized Finance (DeFi) is a rising technology in the fintech sector, challenging the existing banking system. It allows users to utilize peer-to-peer (P2P) transactions, defined as direct interactions between two individuals without third-party intervention. Even though the DeFi system benefits users, its decentralized nature has made it vulnerable to financial crimes, such as money laundering and terrorism funding. Similar is the case with non-fungible tokens (NFTs), which are virtual assets that cannot be duplicated or tampered with. Thus, money launderers commit fraud and transfer illicit funds without being traced. This indicates that the weaknesses in the regulatory and security apparatus of the metaverse must be combatted using the KYB process immediately.
Significance of KYB for The Metaverse
As hinted, the metaverse users disguise their identities and conceal their source of funds. They exploit the security loopholes in this space and not just launder illicit funds between multiple blockchains but also commit fraud against innocent users. Consequently, it is critical for the metaverse spaces to verify business before taking companies on board. Like other industries, an organization’s legality and its owner’s legitimacy (UBO) are mandatory client onboarding checks in the metaverse world. The automated solutions can be utilized to achieve KYB compliance and authenticate the records in the virtual world. These high-tech services enable the virtual spaces to identify criminals, ensure transparency, and achieve AML compliance.