For users to have continuous access to their services, major cryptocurrency exchanges around the world require KYC, or identity verification. How does KYC verification differ from anti-money laundering regulations, why is it necessary and how does it benefit cryptocurrency traders? What is the impact of KYC verification on decentralization in public cryptocurrencies? In this article, we answer these questions as well as others.
What is KYC, or Identity Verification? #
Known as KYC, this acronym stands for “know your customer” or “know your client”. A financial institution verifies the identity of a customer. A valid ID card, utility bills that contain your home address, a passport, and other documents can be used to verify your identity. Different ID documents are required by different institutions, and even by different regions.
At the time of account opening and sometimes after a change in personal information, customers are required to submit identity verification documents. You will be required to update your personal information if, for example, you legally change your name a few months after establishing your account.
A cryptocurrency exchange may not allow you to use all of its features if you do not complete the KYC process. Binance, for instance, allows customers to create accounts, use basic functions, and make limited transactions without submitting KYC information. During the KYC verification process, customers can increase their deposit and withdrawal limits.
The KYC Process #
KYC processes can vary depending on the nature of the business, but they generally fulfill similar objectives. Generally speaking, KYC processes collect and verify data. Customers are also subject to ongoing due diligence and monitoring.
The KYC process can be divided into three parts:
1. Customer Identification Program (CIP) #
KYC is the simplest and first step. Basically, it involves collecting and verifying customer data. Banks typically perform this step during enrollment. The registration process comes after the registration process for cryptocurrency exchanges and other less rigid financial institutions.
2. Customer Due Diligence (DD) #
Performing a background check on a customer after verifying identity may be the next step for a company. A background check is meant to assess the risk of doing business with the customer. The background check will flag the customer if they have been flagged for financial fraud in the past or if they are under investigation.
3. Ongoing Monitoring #
By monitoring KYC information continually, the system is able to identify suspicious transactions and update KYC information as needed. The US terrorist watch list might flag multiple large transactions to a country on a cryptocurrency exchange. According to the investigation, the exchange may suspend the customer’s account and report the case to the relevant regulatory and law enforcement bodies.
Why KYC is Mandatory for Most Crypto Exchanges #
Major cryptocurrency exchanges must comply with Know Your Customer (KYC) regulations to ensure they comply with regulatory laws and regulations.
KYC’s goal is to combat illicit activities and to detect suspicious behavior as early as possible. Using these data, cryptocurrency exchanges ensure that their transactions are secure and compliant.
By failing to perform due diligence, cryptocurrency exchanges may be held liable if a user commits a crime while using their platform. Thusforth, major exchanges prefer to remain anti-money laundering compliant (AML).
Although sometimes related, KYC and AML do not mean the same thing.
The Difference Between KYC & AML #
Know your customer requirements fall under the umbrella term of anti-money laundering (AML). The anti-money-laundering area encompasses a wide range of regulatory processes. Among the other AML processes are software filtering, record management, and criminalization. Identification verification and enhanced due diligence are part of KYC, which is an AML process.
KYC, AML, and all other regulatory processes make it harder for organized criminals and terrorists to hide their criminal activities. Criminals and terrorists cannot disguise funds acquired through illegal means as legitimate funds. There is some disagreement about whether KYC compliance should be mandatory for exchanges, even though this is a benefit. Decentralization is argued to be incompatible with KYC and AML regulations.
Is KYC a threat to anonymity and decentralization? #
Blockchain technology and cryptocurrencies are popular due to their decentralized nature. A decentralized system means that no single authority has ultimate control over it. As opposed to a single database, transactions on these blockchains are stored across a global network of peer-to-peer nodes on numerous computers. KYC requirements make cryptocurrency exchanges like traditional financial institutions because they give power to a central authority.
Losing anonymity to centralized cryptocurrency exchanges is a high price to pay for users concerned with the ethos of anonymity via decentralized blockchains. Cryptocurrency exchanges promise to maintain the privacy of their users, but many people who prefer to remain anonymous don’t want to take such a risk. Many exchanges still have inadequate KYC systems to protect consumer data, so these fears are not unfounded.
By exploiting loopholes in exchange software, hackers have gained access to KYC information of cryptocurrency users.
