KYC Crypto measures are now required for any crypto platform wishing to offer services in jurisdictions such as the US, Australia, and the UK. So What is KYC in crypto and why do crypto exchanges require it? If you do not know yet, please read the article below to learn more.
What is KYC in crypto?
Know Your Customer (KYC) is the first Anti-Money Laundering (AML) due diligence stage. When a financial institution (FI) onboards a new client, KYC procedures are implemented to identify and verify the client's identity. These processes allow the financial institution to assess the client's risk profile based on the client's financial crime propensity.
KYC refers to the process that cryptocurrency exchanges must go through:
- Confirm the personal information of its end users and customers
- Better understand the activity of potential clients and verify their legitimacy.
- Determine the likelihood that their customers pose a money laundering risk.
How does the crypto KYC process look?
In order to comply with KYC measures, cryptocurrency exchanges must take the following steps:
Step 1: Collect Customer Personally Identifiable Information (PII), including their full name, location, date of birth and address.
Step 2: Compare this information with official government-issued identification (such as a passport or state-issued driver's license) and proof of residency (such as a utility bill).
Step 3: Verify the customer's identity against an official database of Politically Exposed Persons (PEPs) and Sanctioned Personal Information.
These steps help financial institutions determine virtual currency money laundering and financial crime risks for each customer. If all goes well, customers are allowed to conduct certain activities on the cryptocurrency exchange.
Why do crypto exchanges require it?
Bitcoin and other blockchain-based cryptocurrencies are not regulated by governments or central banks, allowing users to spend money quickly and securely with minimal fees. Therefore, transactions between people are usually instant and anonymous, taking place on the blockchain of the relevant currency.
The very nature of cryptocurrencies, namely their speed and anonymity, presents an enticing option for criminals trying to avoid traditional AML restrictions. In order to launder money, criminals need to find a way to convert the "dirty" money into cryptocurrency and then cash it out when it's done. This makes cryptocurrency exchanges an ideal place for criminals to launder money.
The importance of KYC compliance for cryptocurrency exchanges cannot be underestimated. Not only does it help build investor confidence, but it also reduces the risk of fraud and money laundering.
So I hope now you will understand what is KYC in crypto and why do crypto exchange require it. The KYC process is designed to prevent financial crimes such as money laundering and terrorist financing. By requiring users to submit personal information, exchanges can weed out bad actors and keep their platforms safe. However, the KYC process also has its drawbacks.
