KYC in Crypto: Why Identity Verification Matters
KYC stands for Know Your Customer, a mandatory requirement process in confirming a person’s real identity using official documents. Financial institutions use the documents to assess the risks associated with their customers and prevent financial crimes, such as terrorism funding and money laundering.
Apart from financial institutions like banks, crypto exchanges have also made KYC mandatory. This article will explore what KYC in crypto is and why exchanges require it.
What is KYC in Crypto?
As we know, the cryptocurrency market has been booming, and governments are attempting to implement new measures to manage and integrate crypto exchanges into traditional financial systems.
Why do crypto exchanges need KYC?
As crypto transactions are generally anonymous and swift, it becomes difficult to track them, and in most cases, criminals try to evade anti-money laundering and criminal activities. New customers are required to complete the verification process to address their AML/CFT compliance responsibilities.
The conventional KYC process includes verifying the user’s identity and address using official documents (ID, address proof, and photo). Digital methods, such as eKYC, biometrics, video KYC, and app uploads, are also used to prevent money laundering.
Risk-based compliance
Risk-based compliance is an approach recommended by the Financial Action Task Force (FATF). It instructs crypto exchanges to perform a risk assessment of individual customers. The exchanges also implement AML/CFT responses accordingly. If the exchanges consider a customer to be high-risk, they should deploy intensive measures.
KYC verification process for crypto exchanges
Here is a detailed explanation of the KYC verification process for crypto exchanges.
- Collect personal information
New customers should provide basic information. Ideally, companies should have a digital customer due diligence (CDD) tool to accurately record relevant data, which also helps minimize human errors. Basic details, such as name, email address, date of birth, and Social Security number, are required to be provided.
This information enables exchanges to draw up a subsequent risk assessment and define their AML/CFT response.
- Verify customer data
Crypto exchanges should collect all the user data as part of the KYC process. They should also ensure that all the information is up-to-date. For this, firms should collect official documents, such as driving licenses, passports, and birth certificates. After obtaining all the documents, they should screen them again against official lists, such as
- High-risk jurisdictions
- Global sanctions and watch lists
- Politically exposed person (PEP) lists
- Criminal registries
- Assign risk rating
From the information collected and verified, firms can assign a risk rating. It is calculated using various factors, including whether an individual is involved in a financial crime.
In countries that instruct a “risk-based approach” to AML, firms should assign a KYC risk rating. It should be done by performing a risk assessment of each user.
- Risk review
After completing the process, firms should analyze customers’ risk profiles and monitor changes. They have to confirm whether an individual’s financial behavior meets expectations.
Benefits of KYC for crypto exchanges
Here are some of the benefits of using KYC by crypto exchanges.
Increases transparency
KYC brings transparency between crypto exchanges and customers. Exchanges that establish user verification indicate that the form is serious about ensuring compliance with regulatory requirements. Moreover, firms would not want to risk their reputation.
Reduces risks
KYC checks can reduce the risk of money laundering and other criminal activities. As we have seen, it enhances transparency between firms and customers. The verification and identification controls help discourage fraudsters.
Lowers legal dispute
Implementing a strong verification and identification process can help regulators mitigate legal challenges. It ensures that regulators are engaged and committed to conform to legal requirements in accordance with international laws.
Improves the stability of crypto markets
As the crypto market is highly volatile, stringent KYC measures can help improve its stability. It can reduce illicit activities and build trust among investors. Moreover, KYC verification can help lower uncertainty to ensure more mature and stable markets.
Can I buy crypto without KYC, and what are the risks associated with it?
Yes, you can buy crypto without KYC from crypto ATMs and decentralized exchanges (DEXs). Cryptocurrencies from a crypto ATM can be purchased using cash or debit cards. On the other hand, DEXs are blockchain-based P2P markets. They permit large-scale crypto asset trading with the use of algorithms.
However, buying crypto without KYC can carry significant risks. A platform might be conducting black market accounts and endangering assets.