I recently signed up for Coinbase, a cryptocurrency brokerage. This brokerage allows you to invest in many different cryptocurrencies, and it allows you to store them inside your own crypto wallet instead of the brokerage’s wallet. You can even use the brokerage to send and receive cryptocurrency off-platform if you provide enough identity verification documents. Other widely used cryptocurrency brokerages don’t let you do this. Many of them allow you to trade cryptocurrency within their apps, but don’t allow you to withdraw or add money by connecting your internal account to external wallets.
Because of these features, Coinbase needs stronger security than other cryptocurrency brokerages, and its security checks are more advanced than the ones I’ve seen at other banks and financial institutions as well. The brokerage has to protect its customers from fraud and satisfy federal know-your-customer (KYC) regulations. And as a result, I observed several security features during the process of signing up for a Coinbase account that I haven’t seen on other fintech platforms.
Coinbase Uses Advanced Address Verification Software
It’s normal for a bank or brokerage to ask you to enter your home address when you sign up for an account. But Coinbase takes this process several steps farther. The platform asked me several questions about other locations near my house. It asked multiple choice questions about major cross streets, local streets in my neighborhood, and even questions about landmarks such as hospitals. It would be possible to look up information about local landmarks online if you knew the address for an account, but Coinbase made that harder by adding a timer to the survey.
Another advanced feature is that Coinbase can check your past addresses as well. This process was instant, indicating that the brokerage has some type of instant background check software. So they immediately knew that I also used to live in Arcata, and I lived there over 10 years ago so this software can obviously check locations fairly far back. Many landlords don’t ask you for prior addresses that are more than 10 years old. And once again, the brokerage asked me geographic questions about Arcata that would be hard to answer if I didn’t actually live there.
It’s unclear whether other banks and brokerages have access to this type of technology or are using it. I haven’t seen these types of questions from Chase or TDAmeritrade, for example, but they would be capable of setting up this type of software and it would improve their security. The process for setting up a new account may have changed over time, though, and I didn’t set up my accounts at those institutions recently.
Coinbase Verifies Identity Cards
Originally, a driver’s license was not meant to be used as an ID card, but it is used that way now. And Coinbase asks for your driver’s license as well. It asks you to take a clear and well-lit picture of both the front and back of the card. That indicates that the brokerage isn’t just checking your picture on the card, it’s scanning other information on the card as well. And it also means that Coinbase has advanced computer vision software and may have access to a facial recognition database as well.
Photos are an additional verification feature that the brokerage can use to protect your account. For example, many apps allow you to sign in with biometric data instead of using a password, and this brokerage would be capable of doing that because it has your picture. I’ve seen other fintech apps that ask you to do things like take a selfie with your smartphone while holding up your driver’s license before. These know your customer checks are more important when you’re signing up online with a fintech that doesn’t have physical offices. If you visit a brokerage office in person, the staff can see if you’re the same person as the one on your ID card.
Other Know Your Customer Features
I felt that it would be a good idea to mention Coinbase’s other identity verification features even though other neobanks and online brokerages use them as well. Some of these features aren’t commonly used by traditional financial institutions yet. Coinbase allows you to directly link your brokerage account to a traditional bank account using Plaid. This link allows you to make ACH transfers instead of using your debit card to send money to the brokerage, and ACH transfers have lower fees than debit card payments.
The link is a standard fintech feature and it provides additional identity verification because you’re using Plaid to sign into a secured bank account that you own. By signing in this way, Plaid knows that you’ve also satisfied the other financial institution’s know your customer requirements. And Plaid’s customer, the fintech where you’re setting up an account, will learn that as well. Plaid sign-ins are not unique to Coinbase though.
Coinbase also asks you questions about how you plan to use the brokerage account, how you plan to fund it, where you’re getting the money you use to fund the account, and so on. These are standard KYC questions that any bank or brokerage will ask. They allow the financial institution to determine how risky of a customer you will be.
Banks and stock brokerages can also use your answers to these questions to recommend financial products to you. It’s unclear whether Coinbase does that because it would be hard to argue that a cryptocurrency investment was suitable for a normal investor, and financial advisors have to be able to make that statement to pitch you a product while calling themselves advisors. Cryptocurrency is very risky in comparison with mutual funds, bonds, and other relatively safe investments.
Coinbase demonstrates how to do a more thorough know your customer check than traditional stock brokerages and banks. The cryptocurrency brokerage checks more information than other neobanks and online brokerages as well. It doesn’t appear that the federal government requires this level of KYC for most institutions, at least right now, but it does appear that these features would further improve the security of fintech apps.