What Is KYC?
Know Your Customer (KYC) is the process of verifying the identity of customers and carrying out financial due diligence to ensure their money is coming from legitimate sources.
In the crypto world, Know Your Customer KYC must be completed before trading on a cryptocurrency exchange or using certain services.
The process involves collecting personal information from customers including:
Date of birth
Proof of address
Depending on the crypto exchange and regulation in any given territory, people signing up to buy crypto may also be asked to provide other forms of documentation, such as a bank statement or utility bill. As with a lot of digital or challenger banks, customers may even need to take a selfie with their ID for additional identity verification.
Once the customer has provided all of the necessary information and documents, they will then be verified by the crypto exchange or service provider. Once this is complete a customer can start trading cryptocurrencies on the platform.
What Are KYC Standards?
There is a set of standards which KYC needs to adhere to, these are:
Establish customer identity: Using government-issued identity documents, such as passports and driver's licenses, KYC must be able to quickly and securely verify the customer’s identity.
Rationale for transacting: Additionally, the KYC process must be able to ascertain what is motivating a customer to transact with a certain company. For example, if a customer wants to open an account with a trading platform, what are the reasons for doing so? If this is for large amounts of cryptocurrency, a source of funds (also known as a Wealth Check) might be an additional requirement.
Screening customers: The last aspect of KYC is screening customers for any potential risks. For example, if a customer is found to have ties with individuals who have been sanctioned by governments or people blacklisted due to money laundering activities, the KYC process should bring this to light.
Why Is KYC important in Crypto?
Legally, Know Your Customer KYC is an important part of crypto trading and a necessary step to protect both customers and crypto exchanges.
The process helps reduce the risk of fraud and money laundering while ensuring only legitimate customers are using the cryptocurrency exchange or service.
Beyond this, KYC assists in the stabilization of cryptocurrency brokers or crypto exchanges, keeping them compliant with KYC regulations and reducing the likelihood of any investigations that could lead to trading being halted.
Brokers in particular are regulated by financial authorities and verifying a customer’s identity protects both the user and the cryptocurrency exchange by preventing unauthorized trading and other potential risks.
What Is Crypto AML?
Crypto Anti-Money Laundering (AML) is a set of processes and procedures that fall under KYC. These are used to protect digital currencies from being used for money laundering, terrorist financing or other criminal activities. This is particularly important because of the decentralized nature of cryptocurrencies.
Crypto AML regulations require cryptocurrency exchanges to collect and verify customer information, such as identity documents and banking details, before allowing them to use their service. This is where KYC checks and identity verification come in.
Cryptocurrency Transaction Monitoring
Further, AML also requires cryptocurrency exchanges to report any suspicious activity on accounts within their network or large transfers of funds - this is known as transaction monitoring.
To do this, cryptocurrency exchanges will monitor cryptocurrency transactions for suspicious activities and flag them for investigation. A transaction could be considered “suspicious” where there is a high volume of transfers between accounts, or if the same address is involved in multiple transactions in a short space of time.
Beyond this, cryptocurrency transaction monitoring also helps to detect activity that might suggest illegal behavior, such as an individual having multiple accounts (which could be used to hide funds).
Do All Crypto Wallets Need KYC Compliance?
The short answer is, it depends. Although KYC compliance isn’t mandatory for crypto wallets, many of them are now implementing it as part of their security protocols. Ultimately this also provides greater security to users who might be storing large amounts of funds in their wallets.
Many wallets also use KYC for higher tiered accounts that allow customers to access certain features such as staking rewards or trading on cryptocurrency exchanges. Generally these are introduced at a higher level because cryptocurrency exchanges and wallets have regulatory obligations that they need to meet in order to remain compliant with anti-money laundering (AML) and counter terrorist financing (CTF) regulations.
What Are the Benefits of Crypto KYC?
The main benefits of using a broker, exchange or wallet with strong KYC processes are:
Increased Security When Trading: By nature, crypto KYC helps protect users from fraud by verifying the identity of individuals or businesses they may come into contact with whilst using a product or service. Essentially, by confirming that those engaging in financial transactions are who they say they are, the potential to carry out anything illegal or untoward is reduced.
Improved Compliance: Crypto KYC helps ensure organizations comply with anti-money laundering (AML) laws and other regulations. For businesses, this ensures they are not allowing criminal activity to take place on their platform. This helps them stay compliant with financial regulations, avoid any penalties or sanctions and maintain an undisturbed trading environment.
Reduced Cost: An effective KYC setup can help reduce costs associated with fraud prevention and compliance measures. By reducing the risk of fraud, organizations don’t need to invest as much money in fighting fraud at every turn.
Increased Transparency and Trust Among Customers: Crypto KYC helps create a level of trust and transparency with brokers, cryptocurrency exchanges and wallets. This can help build customer loyalty.
Less Money Laundering and Scams: Crypto KYC helps reduce the risk of money laundering and scam activities.
Increased Market Stability: Lastly, Crypto KYC can help promote cryptocurrency market stability by reducing potential fraudulent activity.
Can I Buy Crypto Without KYC?
When it comes to buying cryptocurrency, the answer is both yes and no - depending on what type of exchange you choose to use. However, it is rarely possible to buy cryptocurrency without any form of ID.
What Are the Risks of Buying Cryptocurrency Without KYC?
Buying cryptocurrency without going through a KYC process can be risky, as it means the other traders you are interacting with are possibly also unverified and even potentially fraudulent. In addition, if you don’t provide any personal information, it will be difficult for you to recover funds in case of a theft or hack.
Anonymous Transactions Should Be Questioned: These are not always possible when purchasing crypto and crypto exchanges should require KYC processes in order to comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. If an exchange allows a user to sign up without these, it should be questioned who else they may be doing business with (and ultimately how safe your funds are).
Reduced Transaction Speeds: The speed of a crypto transactions may be impacted by a lack of KYC process. The reason for this is that crypto exchanges need to verify identities in order to comply with various KYC regulations and to provide additional security. So if you have to verify upon every crypto transactions, they might take longer.
Large Transactions Could Be Seen as Money Laundering: By not providing personal information during a sign up to a broker or an exchange, large funds moved are more likely to be flagged and investigated as suspicious activity.
Why Is KYC Essential to Cryptocurrency’s Longevity?
For crypto, KYC is becoming increasingly important as governments all over the world are attempting to regulate what was once an unregulated cryptocurrency market.
By investing in KYC procedures, businesses can protect their customers from the risk of fraud, money laundering and other illegal activities. Moreover, by collecting customers’ personal data such as their name, address and date of birth, businesses are able to create a secure environment for transactions to take place.