While this is a benefit, some members of the cryptocurrency community are divided on whether exchanges should make KYC compliance mandatory. They will be unable to make funds acquired through illegal means appear legitimate. KYC, AML and all other processes put in place by regulators make it more difficult for organized criminals and terrorists to hide their illicit activities. KYC is simply a process of AML that involves identity verification and enhanced due diligence. Other AML processes include software filtering, record management, and criminalization. AML includes a vast range of regulatory processes designed to curb money laundering. The know your customer requirements are just one part of a broader umbrella term commonly called anti-money laundering (AML). What is the Difference Between KYC & AML? However, KYC and AML do not convey the same thing. Henceforth, major exchanges prefer to remain anti-money laundering (AML) compliant. Without KYC verification, a cryptocurrency exchange may be held liable when a user gets away with committing a crime because they failed to do due diligence. Cryptocurrency exchanges utilize these data to track transaction patterns, in order to ensure that there is no money laundering and terrorism funding for example. The goal of KYC was to curb illicit activities and to highlight suspicious behaviour as early as possible. However, it wasn't passed into law until after the 9/11 terrorist attacks. In 2001, KYC verification was introduced and cemented into the Patriot Act. As the price and interest in cryptocurrencies increased, concerns about crime in areas of money laundering and other illicit activities have also come under scrutiny. In the past, cryptocurrency exchanges rarely requested KYC details. Know Your Customer (KYC) regulations are mandatory for major cryptocurrency exchanges because it ensures they comply with regulatory rules and laws. Why is KYC Mandatory for Most Crypto Exchanges? Depending on the investigation, the exchange might suspend the customer’s account and report the case to the necessary regulatory and law enforcement bodies. For a cryptocurrency exchange, multiple large transactions to a country that is on the US terrorist watch list might be flagged out. ![]() Ongoing monitoring ensures that KYC information is up to date and allows the system to continually scrutinize transactions that may appear suspicious. If the customer has been flagged for financial fraud in the past or is under investigation, it will be flagged during the background check. The goal of the background test is to perform a risk assessment. For cryptocurrency exchanges and other less rigid financial institutions, it comes after registration.Īfter verifying identity, a company may decide to dig deeper by performing a background check on the customer. For banks, this stage usually comes during enrollment. It simply involves the collection and verification of customer data. This is the first and most straightforward KYC process. KYC verification is usually grouped into three parts and processes: It also involves customer due diligence and ongoing monitoring. KYC comprises the basic features such as data collection and verification. ĭepending on the nature of a business, KYC processes may vary but generally, they fulfill similar objectives. In order to gain full access and increase higher deposits and withdrawal limits, customers will need to complete the KYC verification. For example, allows customers to create accounts, use basic functions and perform limited transactions without submitting KYC information. If you do not complete the KYC process, you may not be able to access all the features on a cryptocurrency exchange. ![]() For example, if you change your name officially a few months after creating your account, you will be required to update your KYC information. ![]() It includes information that can be used to verify your identity, like a valid identification card, utility bills with your house address, social security number, etc.Ĭustomers are typically required to submit KYC details during account opening and at times, when there has been a change in the information. It refers to a mandatory verification of a customer's identity, typically by a financial institution. KYC is an acronym for “know your customer”, but it could also mean “know your client”. Why is KYC verification necessary, how does it benefit cryptocurrency traders, and how is it different from anti-money laundering regulations? Does KYC verification defeat the purpose of decentralization in public cryptocurrencies? We’ll address these questions in this post. Like other financial institutions, major cryptocurrency exchanges across the globe make KYC verification mandatory for uninterrupted access to their services.
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