As the cryptocurrency market grows and matures, global and national financial regulators are increasing pressure on businesses that offer digital asset-related services to adhere to the same regulations as conventional banks. Know-your-customer (KYC) measures are being used to prevent the illegal use of cryptocurrencies, even though there is still much debate about balancing privacy and security.
What is Money Laundering?
Money laundering is the process of purifying “dirty money.” The term “dirty money” refers to funds obtained dishonestly or illegally.
This cash is injected into the economy because legitimate businesses generate it. Money laundering makes illegal funds appear to have originated from a legitimate source.
Anti-Money Laundering (AML) laws prevent money laundering in most nations. The G7 countries established the Financial Action Task Force (FATF) in 1989 to combat global money laundering. Later, it expanded to include inquiries about terrorist financing.
Businesses can avoid money laundering by adhering to FATF recommendations. Know Your Customer (KYC), and Anti-Money Laundering (AML) must collaborate to prevent money laundering and terrorism financing.
What is the Meaning of “Know Your Customer” (KYC)?
Know Your Customer stands for “Know Your Customer” in the business world. It allows banks to verify that their customers are who they claim to be.
Typically, an individual’s identity is verified well before they become a paying customer. Before conducting a financial transaction on the platform, users must verify their identity.
What Does KYC Mean in Cryptocurrency?
The first step in anti-money-laundering (AML) due diligence is known as “Know Your Customer” (KYC). Know Your Customer (KYC) procedures are established when a financial institution (FI) accepts a new client. With these steps, banks can determine a client’s risk profile by assessing their likelihood of committing an economic offense.
Know Your Customer (KYC) procedures are required for cryptocurrency exchanges and wallet providers as part of their anti-money laundering (AML) programs.
Know Your Customer regulations require that virtual currency exchanges:
- Ensure that they are aware of their clients and end users.
- Determine how their prospective clients conduct business and verify their authenticity.
- Determine the likelihood that one of their customers will engage in money laundering.
Why Must crypto have KYC?
Ransomware attacks, in which users cannot use their computer or network until they pay a ransom, are an example of undesirable crypto behavior that could be prevented by requiring KYC compliance. In 2020, victims of attacks compensated their attackers with nearly $350 million in cryptocurrency. The attackers used the anonymity provided by decentralized cryptocurrencies to avoid being apprehended.
The Ransomware Task Force (2021) recommended, among other things, stricter enforcement of existing KYC laws. It was also stated that the crypto sector enabled this attack.
It is possible that implementing KYC measures across the economy will improve the public’s perception of crypto assets. More stringent compliance, such as more rigorous methods of proving one’s identity, could assist crypto in shedding its association with money laundering and other illegal activities. This could generate additional interest and funds.
Which KYC Documents are Required?
There are no regulations regarding the Know Your Customer (KYC) procedure. Therefore, different banks and exchanges for cryptocurrencies can implement their own rules and requirements. However, occasionally the following types of documentation are required:
1) Evidence that a person is who they claim to be
Any of the following can be used to establish one’s identity:
- A photo ID issued by the government, such as a driver’s licence.
- Identification numbers (passport, SSN, or tax ID) (TIN)
- Certificate of Eligibility to Vote
2) Obtaining the appropriate documentation and a current address
The following items can serve as evidence of residency:
- Costs for utilities
- Bank statement documents
- Lease contract
Depending on the platform’s guidelines, this could be a recent image or one from the user’s profile.
Why is Know Your Customer (KYC) so Crucial in Cryptocurrency Exchanges?
Customers are more likely to trust more transparent companies. Identity verification increases a company’s exposure and fosters client confidence. Users are more likely to remain with a cryptocurrency exchange if they believe it takes account security seriously.
Facilitates keeping track of things
During the Know Your Customer (KYC) process, records that can be used for various purposes, including tax and financial reporting, are created.
Money laundering and other crimes are less likely to occur because:
In 2022, Chainalysis, the leading blockchain analytics company, reported that criminals had laundered $8.6 billion in cryptocurrency 2021. This represented a 30% increase from the prior year. Comprehensive and accurate identity verification can reduce fraud and enhance a company’s market standing.
Helps to Serve Client Needs
Businesses can better meet their clients’ needs when they can verify their clients’ identities. This will allow these banks to meet the needs of their customers better.
Reduced Legal Danger
Strong Know Your Customer (KYC) policies allow businesses to stay ahead of the game and focus on increasing conversion rates, making transactions more accessible, and ensuring transactions are legal as international regulations change.Companies are less likely to be sued or fined by the government if they can demonstrate that they have conducted KYC due diligence.
Better Market Stability
Untraceable transactions have contributed significantly to the volatility of cryptocurrencies. KYC programs, which include improved identity verification, contribute to a more stable and valuable market.
Some disadvantages of KYC include:
a) It takes considerable time.
Typically, the Know Your Customer process is time-consuming. According to our research, a small number of crypto exchanges can take weeks or even months to process Know Your Customer (KYC) documents for users.
b) Concerns Regarding Data Security
This is the most significant possible risk associated with Know Your Customer procedures. The cryptocurrency market collects user data. They must ensure the security of this information. Hackers have previously stolen this information. This puts users at a high risk of having their identities stolen.
Therefore, we agree that Know Your Customer procedures benefit everyone. We cannot allow criminals and other undesirables to use blockchain, a potentially lucrative new technology. Using KYC procedures, a business can better manage risks and protect itself from harm.
Users have a right to privacy, and these Know Your Customer (KYC) rules must be fair. Therefore, it is necessary to strike a balance between the two. If you hire a reputable provider of cryptocurrency exchange development services, they can assist you in establishing the procedure of verification required to launch your project securely.
Merci for reading! I hope you now understand better the importance of “Know Your Customer” (KYC) procedures for cryptocurrency trading platforms. Please feel free to share your thoughts and feelings with us.
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