Introduction to KYC in Crypto

The initial reasonable care anti-money laundering (AML) level is called Know Your Customer, or KYC for short. Know Your Customer (KYC) processes begin once a new customer is accepted by a financial institution (FI). Financial institutions may determine a customer’s likelihood of committing financial crimes using these procedures. In doing business, cryptocurrency exchanges must have a Know Your Customer (KYC) procedure in place to:

• Check the accuracy of the data they have about their clients and clients.

• Get a better understanding of the behavior of their potential customers and ensure they are of a high standard.

• Demonstrate the potential for their clients to pose a money laundering risk.

How does VASP show KYC compliance?

Many VASPs use a multi-step “know your customer” procedure to protect against fraud. Here are the actions to take:

• Step 1: Collect customer identification information (such as full names, dates of birth, and addresses).

• Step 2: Verify the information you provided against your government-issued ID (visa, government driver’s license) and proof of address (electricity bill).

• Step 3: Check user data against government records that track politically exposed persons (PEPs) and blacklisted people.

By adhering to these protocols, banks can determine if their customers are at risk of money laundering as well as other misappropriation of funds related to their use of cryptocurrency. When the customer’s identity and other details are verified, they are given access to a limited set of features on the bitcoin trading platform.

How does one track cryptocurrency trades?

The Cryptocurrency Transfer Monitoring Network provides cryptocurrency markets and financial institutions with assistance in detecting anomalous or questionable behavior that they need to disclose to government regulators. In addition, this technology helps law enforcement in pursuing criminals. The security of a cryptocurrency wallet can be tracked by monitoring its transaction activity. Toolkits developed by companies like Bitsoft360, Crystal Blockchain, Coinfirm, etc. They are used by cryptocurrency related exchanges.

Is Know Your Customer (KYC) Compliance Necessary for Cryptocurrency Wallets?

Since only custodian wallets have access to the crypto keys of their users, they are the only ones required to follow KYC procedures. The VASP document makes it clear that the Financial Action Task Force (FATF) considers “every legal or natural entity that exchanges, holds, maintains a security, distributes, transfers or distributes in some way at the expense of some other physical or legal entity” as a VASP.

Because VASPs are now considered “money institutions,” they must also implement strict annual compliance (FYC) requirements. To comply with the regulations, custodian wallet providers linked to VASP must have a Know Your Customer (KYC) policy in place.

In what ways can cryptocurrency help you know your customer?

Here are some of the reasons why cryptocurrency exchanges get a huge advantage from operating according to regulatory requirements, even though doing so requires some changes in their operating procedures and presents some challenges:

Increase consumer confidence in the business

Trust in companies and their products can only increase when users’ identities are independently verified. Clients are more inclined to stick with a trading platform if they believe the company takes reasonable precautions to keep their funds safe.

Reducing cases of fraud and money laundering

Nearly $1 billion in cryptocurrency was reported to have been stolen from more than 46,000 customers between January and March 2022. As Fletcher predicted, thorough and accurate identity verification procedures can reduce fraud and improve the reputation of the market.

Minimize potential legal problems

Strong Know Your Customer (KYC) procedures can help organizations stay ahead of changing systems. By claiming government-issued credentials and tracking payment statuses and holdings, KYC approaches allow VASPs to detect and mitigate fake identity cases, avoid financial fraud, and assess customer risk.

By taking these actions, companies may reduce their exposure to legal and governmental concerns, freeing up resources that can be used to achieve other goals, such as improving exchange rates, speeding up operations, and ensuring compliance.

improve market conditions

Anonymous speculative transactions are a major driver of Bitcoin market instability. The industry as a whole benefits from the greater stability and value development offered by KYC procedures with enhanced identity verification.

Is Know Your Customer (KYC) mandatory for buying cryptocurrency?

You can purchase VAs without completing a KYC check. Examples of non-KYC services are crypto ATMs and DEXs. Unlike DEXs, which are decentralized, blockchain-based P2P exchanges that allow large-scale trading of crypto assets, crypto ATMs allow customers to obtain bitcoin using cash or debit cards. Instead of acting as financial intermediaries, DEXs rely on algorithmic automation to carry out these functions.

What risks are there while buying cryptocurrencies without KYC?

Purchasing virtual currencies without first going through your KYC is regulatoryally risky. Financial authorities, including the Office of Foreign Assets Control (OFAC), have fined cryptocurrency exchanges for alleged violations of the sanctions. Black market accounts, which pose a risk to assets, may be flagged as fake accounts by the platform.

Lack of KYC in exchanges

Popular DEXs such as Uniswap and Bisq do not require KYC procedures from their users. These marketplaces connect buyers and sellers of digital money by matching orders according to price and quantity. In the world of cryptocurrency, a “liquidity pool” is a group of commodities that can be quickly and easily converted into cash to settle incoming buy and sell orders. The assets are not provided by banks or other institutions but by the end users.

How does KYC relate to an encrypted travel rule?

When discussing online safety, KYC and the Coded Travel Rule are two key concepts to understand. Whereas the travel rule states that financial institutions and VASPs obtain and report debit information, KYC collects and transmits data about the people and organizations that use the FI or VASP.

Distinguishing between “know your customer” and “travel rule”

Before enabling a consumer to use its system, a VASP must perform Know Your Customer (KYC) checks to ensure compliance with international rules. The Travel Rule goes further by requiring that consumers’ personally identifiable information be shared and stored when purchases between two VASPs that have already implemented KYC on their customers exceed a certain level.

How Are Anti-Money Laundering and Know Your Customer Measures Become Critical to the Cryptocurrency Industry?

Clients and VASPs alike benefit from strict adherence to AML and KYC rules. Virtual currencies, unlike cash, lack a robust organizational structure.

Criminals are increasingly taking advantage of the ability to send money while concealing its source and destination. The risks of money laundering, terrorist financing and other forms of illegal financing can be reduced by standardizing regulatory standards and conducting Know Your Customer and Anti-Money Laundering checks.

Final thoughts

Cryptocurrency transactions are more secure when using KYC. To prevent fraudulent fraud and ensure the integrity of financial transactions, Know Your Customer (KYC) procedures are essential. While this post does not provide insights into KYC implementation, it did give you enough detail to come up with a wise plan.