Know Your Customer (KYC)

Dec 9, 2022 | Updated Dec 9, 2022
KYC or “Know Your Customer” is a procedure used within financial institutions to confirm their customers’ identities and prevent fraudulent activity.

What is Know Your Customer in Crypto?

Know Your Customer is an anti-money laundering (AML) due-diligence regulation. As with traditional financial institutions, it is mandatory for many crypto service providers.

These regulations are designed enable transactions to be tied to customers’ real-world identities, in an effort to detect and mitigate tax evasion, terrorist financing, and prevent other financial crimes. KYC is a common protocol in investment firms, insurance agencies, banks, and other financial institutions to ensure that all customer information and data is genuine. KYC policies are also important to verify whether a customer is involved in any fraudulent activity.

What KYC Information is Required?

The main objective of KYC is to prevent crypto for being used to facilitate illicit activities, or launder money. Although some crypto exchanges allow their customers to open an account without going through the KYC process, these accounts will be highly restricted until they complete their verification process. They limit the amount that customers can deposit, and may restrict them from purchasing assets or withdrawing funds.

The KYC process may vary depending on the exchange, but in general, an exchange will ask for details, including:

  • Customer name
  • Social Security number
  • Account number
  • Date of birth
  • Residential address (proof of residency)
  • Electronic identity verification
  • Government-issued ID cards such as passports, driver’s licenses, utility bills, etc.

The exchange validates this information from official databases and assesses whether they are in compliance with the KYC measures. They will also assess if the customer has a high-risk or low-risk profile, or is involved in any corruption or criminal activity.

They will also screen a customer to see if they are:

  • A politically exposed person (PEP)
  • Involved in adverse media (negative or unfavorable news)
  • Part of international sanctions.

What is the Point of KYC in Crypto?

Most cryptocurrencies are unregulated assets and do not fall under the jurisdiction of any centralized authority, banks, or AML restrictions. Crypto transactions are anonymous and fast, making it easier for bad actors to engage in money laundering schemes. KYC procedures help limit these criminal activities, prevent scams, and boost user confidence in crypto as a whole by ensuring that crypto exchanges are safe places for financial transactions.

Benefits of KYC in Crypto

The benefits of KYC regulations include:

  • Ensure compliance for platforms – KYC procedures help businesses and financial organizations comply with state legislations and international norms, reducing legal disputes and risks.
  • Build customer trust and transparency– Many crypto exchanges are still unregulated and can facilitate nefarious activities. KYC processes largely prevent this and help build trust.
  • Enhance market stability – Identity verification secures transactions to support stability in the market.
  • Safeguard reputation – By evading criminal activities, organizations can protect their funds, prevent damages, and protect their reputation in the market.
  • Curb money laundering cases – The crypto market reported a 30% hike in money laundering from 2020 to 2021. KYC is an important preventive measure that crypto exchanges can undertake to curb money laundering.

Risks of KYC in Crypto

Cryptocurrencies are a part of the decentralized economy, and any regulation compels them to remain under the control of a regulatory authority. KYC also affects anonymity, as customers must share their personal information with a centralized authority. Identity verification is time-consuming and can delay transactions and other financial activities. Moreover, it also provides an opening for hackers to steal customers’ personal information from exchange databases.

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