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As the cryptocurrency world seeks to be legitimized, they are required to follow the same laws and regulations as any other financial entity, such as a traditional bank, loan company, or stock brokerage. One of these important rules is KYC, which stands for “know your customer” or “know your client.”
This article will explain what KYC means in the context of crypto and discuss why it’s important for protecting customers from criminal activities. Finally, we’ll look at how KYC helps crypto exchanges stay anti-money laundering compliant.
What is KYC for Crypto?
During the setup of your account on a crypto exchange, you will often be asked to provide identification to verify yourself. Typically, this is a government-issued photo ID, such as your driver’s license, passport, etc. However, keep in mind that these requirements will vary from exchange to exchange and country to country.
There are three important facets of KYC.
The first is the Customer Identification Program (CIP). This entails the exchange of collecting and verifying the customer’s information. This process is more strict when dealing with traditional financial institutions. Since crypto lies in a bit of a gray area at the moment, these requirements are less stringent.
The second feature is Customer Due Diligence (DD). After completing the CIP step, the company is still responsible for running a background check and ensuring the person is associated with crimes such as fraud, identity theft, or terrorism.
Finally, the last part of the process is Continued Monitoring. Even after the first two steps are complete, the company is still required to continuously monitor the account and ensure all the customer’s data remains up-to-date and accurate.
How Does KYC Protect the Customer?
Trust is an important part of doing business. KYC shows customers and clients that the company takes security seriously. While it can be initially frustrating, going through the KYC process protects people from being victims of identity theft and fraud. It also gives them the confidence they’re dealing with a legitimate company.
How Does KYC Protect the Company?
By complying with KYC requirements, exchanges can lower the risk of illegal financial activities. Specifically, there are two important activities KYC implementation works to fight against.
First, it’s designed to prevent money laundering. Money laundering is a huge problem for banks and financial institutions. However, crypto is especially appealing to criminals because it’s anonymous and you can quickly send money worldwide.
Second, KYC works to prevent identity theft and other financial frauds. For instance, criminals use stolen or fake IDs to open up a crypto account. Then they can link the victim’s bank account and clean them out.
The key takeaway is that criminals often rely on anonymity to commit their crimes and KYC strips this tool away from them.
