KYC

KYC is the abbreviation of Know Your Customer in English. The purpose of KYC regulations is to reduce identity theft and fraud by allowing businesses to collect and verify key data about their customers to truly understand who they are. Financial institutions (FIs) often make customers go through KYC measures when opening new accounts, applying for loans, making investments, and taking other important actions. These typically include requesting verification of identity data (such as driver's licenses, SSNs, and other financial statements) and storing this data to ensure compliance in the event of an audit.

While cryptocurrency exchanges now abide by the same rules as their traditional financial counterparts, some oppose regulation, arguing that collecting this data undermines the anonymity of cryptocurrencies. Other exchanges require customers to upload identity data when creating an account, but immediately allow trading access before verifying this data - revoking privileges only if KYC checks reveal worrisome circumstances. Others have decided to opt out of US KYC regulations by suspending access to US users.

However, despite attempts to cut corners or circumvent KYC cryptocurrency regulations, the growing cryptocurrency market and more mainstream appeal virtually guarantees that KYC rules will not only expand to exchanges but also spur increased regulatory enforcement.

Advantages of KYC

Although KYC regulations bring operational changes and challenges, cryptocurrency exchanges will gain substantial benefits by ensuring compliance, including:

Improve Customer Transparency And Trust

Verifying user identities both increases transparency and builds customer trust – when users are confident that your cryptocurrency exchange is taking proactive and preventive measures to protect their accounts, they are more likely to continue using your service.

Reduce the Possibility of Money Laundering and Other Fraud

According to Forbes, there were more than 80,000 cryptocurrency fraud incidents in the United States last year, a 24,000% increase from 2016. Strong identity verification can significantly reduce fraudulent activity and improve market reputation.

Reduce Legal Risks

As legal expectations continue to evolve, implementing a robust KYC policy allows companies to stay ahead of the curve – rather than rushing to catch up, they can focus on improving conversion rates, streamlining transactions and ensuring compliance with evolving international guidelines. By demonstrating KYC due diligence, companies can reduce the risk of legal challenges or regulatory penalties.

Enhance the Stability of the Crypto Market

Crypto markets are notoriously volatile, in part due to anonymous transactions that may be suspicious or criminal. Adding identity verification as part of a KYC program can help stabilize the entire market and increase its market value.

Risks of KYC

The changing regulatory environment and relatively novel criminal methods complicate KYC compliance in the cryptocurrency space. Therefore, cryptocurrency exchanges should be aware of the following vulnerabilities and risks when developing and implementing KYC solutions:

Anonymous Transactions

Cryptocurrency exchange transactions provide money launderers with a level of online anonymity. Exchanges should therefore seek to digitally inform their authentication processes, including capturing biometric customer information such as face, voice and fingerprint scans.

Transaction Speed

Cryptocurrency funds can be transferred between accounts in seconds, often exceeding AML/CFT controls. Exchanges should ensure that their own AML/CFT checking and monitoring processes are completed before funds are transferred to user wallets.

Structured Transaction

Money launderers may attempt to circumvent reporting thresholds by structuring small transactions across multiple accounts. Cryptocurrency exchanges should ensure that their controls prevent the creation of multiple accounts and share information with other financial services providers to detect and prevent structured strategies.

Money Laundering

Money launderers may seek to further exploit the vulnerability of cryptocurrency transactions by forcing or incentivizing third parties (called "money mules") to participate in cryptocurrency exchange services on their behalf. Exchanges should detect money mules through proper due diligence and identifying customers whose profiles do not match their wealth or expected financial behavior.

Negative Nustomer Experience

In addition to regulatory risks, cryptocurrency exchanges with inadequate or inappropriate KYC procedures may also have a negative impact on customers’ service experience. Under a risk-based approach, KYC enables exchanges to build detailed risk profiles – and subsequently adapt their AML/CFT controls to better suit individuals. With this in mind, effective KYC is a way to optimize a low-risk customer experience, ensuring service speed and efficiency without the need for burdensome AML/CFT reviews.