There’s no escape from KYC in the world of finance and banking operations. For the newbies out there, KYC means Know Your Customer. It is a mandatory process for identifying and verifying customers the world over. In this post, I’ll give an overview of what KYC is, where it came from, the difference between KYC and AML, why it’s important, what you may need to provide and we’ll take a look at KYC and digital cryptocurrency exchanges. Without further ado, let’s dig into ‘cryptocurrency KYC and why it matters’.
Why introduce KYC?
KYC laws were introduced in 2001 as part of the Patriot Act which was passed after 9/11 to provide a variety of means to deter terrorist behaviour.
By first verifying customers’ identities and intentions and then understanding their customers’ transaction patterns, financial institutions are able to more accurately identify suspicious activities.
Terrorist financing and money laundering often rely on anonymously opened accounts and the increased emphasis on KYC regulation has led to increased reporting of suspicious transactions.
Regulations are becoming stricter, meaning financial institutions have to spend more money to comply with them – or be subjected to steep fines.
KYC in the cryptocurrency sphere is something that is increasingly important as the industry matures
KYC and AML: what’s the difference?
The AML concept is much broader than KYC. AML stands for Anti-Money Laundering and refers to a set of policies, laws and regulations to combat generating income in a fraudulent way.
An AML program may consist of the following:
- KYC procedure: Customer Due Diligence (CDD) and Enhanced Due Diligence(EDD)
- Risk-based AML policies
- Ongoing Risk Assessment (RA) and ongoing monitoring
- AML compliance training programs for staff
- Internal controls and internal audits
Why does Cryptocurrency KYC matter?
Cryptocurrency KYC is a manual process that includes physical verification of document scans. It is important because it makes sure that the customer and the information provided is real.
For cryptocurrencies to reach a level of mass adoption there needs to be trust. As virtual currencies and exchanges have a history of hacks and scandals, new customers find it difficult to trust in cryptocurrency. For exchanges to work, people need to trade assets, and to carry out these trading activities, customers must trust that their money is safe.
By implementing KYC procedures, exchanges demonstrate trustworthiness to new users. Identity verification systems not only help exchanges to know who is using their services, sorting the criminals from legitimate customers, it also engenders trusting customers.
KYC and digital exchanges
While some people may see anonymous trading as a feature of the cryptocurrency market, it can also enable problematic business practices and criminal or terrorist activity. Anonymity in the wrong hands can be a dangerous weapon.
In essence, the cryptocurrency KYC process for digital exchanges and banks is the same. It always requires proof of identity (POI), proof of address (POA) and other relevant information for verification. However, the actual steps included in the process may differ from exchange to exchange
Cryptocurrency exchanges can request or accept different types of IDs, ask to sign different forms and include different procedures overall.
OK, I know KYC is my friend, but I still want options on no KYC needed digital exchanges…
There are several bitcoin exchanges on the market which allows you to use the services without verifying your identity. This means that during registration no personal details need to be provided. At an anonymous bitcoin exchange, in most cases, you just need to provide an email and a password and you can trade instantly.
A limitation (depending on your viewpoint on the subject of KYC) of anonymous crypto exchange platforms is they apply a threshold for unverified users both in terms of trading volume and daily or lifetime withdrawals.
This can cause a potential problem to those who would like to engage in trading activity anonymously with a high amount of funds.
Exchanges that offer no KYC options include:
PrimeXBT.com Bitmex.com Livecoin.net HitBTC
I’m going to trade on a centralised exchange – what documents do I need?
The most important documents for submission are proof of identity and proof of address.
The following documents are generally accepted as proof of identity:
- Driving license
- Voter’s Identity Card
When it comes to proof of address, the documents that can be submitted are as follows:
- Utility bill, e.g. telephone bill, electricity bill, gas bill
- Bank account statement with signature verification
- Letter from employer, bank manager of scheduled commercial banks
*** TOP TIP — Always have up to date documentation saved in the correct format ready to upload to pass KYC. Passing the checks in one attempt is the best way to reduce the frustration of back and forths between the platform’s support team***
What happens after verification?
KYC updates also include monitoring customer transactions, which is an essential element of the KYC policy. Why is it done? To be able to differentiate between normal and suspicious customer behaviour in the financial sector, this behaviour needs to be analysed in the first place. It’s better done through transaction monitoring.
Some problems with KYC
Given the cost of instituting KYC/AML, startups and smaller companies are often the ones who suffer the most. A company that cannot afford to dedicate funds toward KYC/AML regulation, in many cases, will not receive licensing.
Cryptocurrency KYC [why it matters] wrapped up
KYC/AML at the moment acts as a double-edged sword. Implementation has the ability to attract investors who are sceptical of the security in the crypto industry. However, they also can limit innovation altogether by restricting licensing to companies which cannot afford the cost of KYC/AML upkeep.
In an increasingly regulated space, KYC will become increasingly used as the standard when using platforms. The most notable thing KYC provides in the crypto industry is much-needed maturity.