Financial institutions are more vulnerable to illegal criminal activity in an economy that is becoming more global.
These institutions are protected by Know Your Customer (KYC) regulations from fraud, corruption, money laundering, and terrorism financing. KYC takes several steps to determine the client’s identity, comprehend the nature of the customer’s actions, and confirm the legitimacy of the source of funds. Last but not least, it evaluates the risk of money laundering linked with the customer.
What is KYC?
The first stage of anti-money laundering (AML) due diligence is known as Know Your Customer (KYC).
In order to identify and confirm a new customer’s identification, a financial institution implements KYC procedures. Financial institutions can use these procedures to determine a customer’s risk profile based on their propensity for financial crime.
Since they are now governed like financial organizations, cryptocurrency exchanges and wallet providers must incorporate KYC procedures into their AML systems. KYC is the procedure that cryptocurrency exchanges must go through in order to:
- Verify the personal data of their clients and end-users
- Understand better the actions of their potential clients and confirm that they are lawful
- Analyze the likelihood that their clients pose a risk for money laundering
Cryptocurrencies And KYC
Although cryptocurrency is widely commended for being decentralized and a secret transaction means, these advantages also cause difficulty in fighting money laundering. As a result, government organizations are searching for methods to enforce KYC on cryptocurrency marketplaces. As such, cryptocurrency platforms must verify their users, much like financial institutions.
Criminals see cryptocurrencies as a tool to improve their criminal activities and as a way to launder money. Many sites have adopted KYC procedures, even if they are not needed. The two types of exchanges are crypto-to-crypto and fiat-to-crypto. Crypto-to-crypto exchanges are not under the same requirements to implement KYC rules as exchanges that deal with fiat currencies since they do not trade with conventional currencies.
Exchanges that convert between fiat money and cryptocurrency enable transactions. Since fiat currency is a country’s official currency, most trades use some form of KYC. Fortunately, financial institutions should have already verified their clients in accordance with KYC regulations.
The Crypto KYC Process
Cryptocurrency exchanges must take the following steps in order to comply with KYC regulations:
- Gather the personally identifiable information (PII) about their clients, such as their full name, location, date of birth, and address.
- Compare this data to their certified government-issued identity, such as a passport or state-issued driver’s license, and residency documentation, like a utility bill.
- Check the customer’s identification against government databases containing data on sanctioned and politically exposed people (PEP).
These procedures help financial institutions assess each client’s financial crime risk and money laundering with digital currencies. The consumer can carry out specific actions on the cryptocurrency exchange if everything is in order.
Takeaways
- The first stage of anti-money laundering (AML) due diligence is known as Know Your Customer.
- Know Your Customer regulations protect institutions from fraud, corruption, money laundering, and terrorism financing.
- Criminals see cryptocurrencies as a tool to improve their criminal activities and as a way to launder money.
- Crypto-to-crypto exchanges are not under the same requirements to implement Know Your Customer rules as fiat-to-crypto exchanges.
