What is Know Your Customer (KYC) on crypto exchanges?
As the cryptocurrency industry develops and becomes more established, global and national financial regulators are increasing the amount of pressure placed on businesses that offer services related to digital assets in order to ensure that these businesses adhere to the same regulations as traditional banks. Know-your-customer (KYC) procedures are helpful in preventing the illegal use of cryptocurrencies. This discussion is ongoing, but it is important to note that effective KYC standards are helpful in preventing unlawful use of cryptocurrencies.
What actually is Know Your Customer (KYC)
The abbreviation KYC stands for “know your customer,” which can also be written as “know your client.” The process of confirming a customer’s identification, which is often carried out by a financial institution, is referred to as identity verification. Information that may be used to verify your identity, such as a valid identification card, utility bills including your home address, a passport, or any of a number of other similar documents, is required for the purpose of identity verification. The necessary forms of identification are often different from one institution to the next and even from one location to the next.
Customers are often requested to present identity verification papers when creating a new account and at other times when there has been a change in the user’s personal information. For instance, if a few months after you create your account you decide to formally change your name, you will be forced to update your personal information to reflect the change.
If you do not complete the Know Your Customer (KYC) procedure, it is possible that you will not be able to use all of the services that are available on a cryptocurrency exchange. For instance, some exchanges let clients open accounts, access basic functionalities, and carry out limited transactions without requiring them to provide their KYC information. Customers will be required to finish the KYC verification procedure in order to acquire full access, which will also result in increased limitations for both deposits and withdrawals.
Check also: How To Stay Private and Safe in Crypto Today?
How does KYC with cryptocurrency work?
KYC in cryptocurrency tries to stop illicit actions including money laundering, terrorist funding, and tax avoidance by authenticating the identity of a consumer.
Customers may be able to open an account on some exchanges before going through the crypto KYC procedure, but these accounts are often quite restricted until the identity verification process is finished. For instance, many exchanges won’t let a consumer withdraw money or really buy cryptocurrency unless their identification has been confirmed. Some people will set a cap on deposits.
The way each cryptocurrency exchange handles KYC will vary. However, usually speaking, you will have to give the cryptocurrency exchange your: during the KYC procedure.
- Complete name
- Born on [date]
- Residential address
The cryptocurrency exchange will then request a photo of an ID card that is currently in good standing, such as a passport or driver’s licence. They’ll use this data to confirm your identification after that. They will provide you access to their services after properly verifying your identification.
A crypto exchange may occasionally go through a more thorough process of consumer due diligence. In some situations, you can also be required to send them a selfie and some other details. In accordance with Financial Action Task Force (FATF) recommendations, crypto exchanges should implement a risk-based strategy for crypto KYC compliance. Accordingly, low-risk consumers will deal with less rigorous requirements, while high-risk customers would need to comply with tougher crypto KYC compliance requirements.
Read also: Differences between centralized and decentralized digital networks
Advantages of KYC
Because criminals use a wide variety of methods to circumvent AML/CFT safeguards, knowing your customer (KYC) procedures are extremely crucial in financial situations. Thankfully, a cryptocurrency exchange can easily identify users who are misusing their services and prevent crimes like money laundering and financing terrorism by building a detailed and accurate risk profile of each customer. These crimes include laundering money and funding terrorist organizations.
(KYC) process helps establish trust and openness with customers
Increasing transparency and gaining the trust of customers may be helped along by verifying the identity of users. After all, a consumer is more likely to continue using your service if they have faith that your bitcoin exchange is being proactive and taking preventative actions to safeguard their funds.
KYC helps reduce the likelihood of financial crime
Since 2016, there has been a steady increase in fraudulent activity involving cryptocurrencies. According to Forbes, there were 80,000 instances of fraudulent activity involving cryptocurrencies in the United States alone in 2020. This reflects a growth that is equivalent to 24,000,000% over the same figure in 2016. Additional analysis indicates that unlawful transactions using cryptocurrencies totaled around $14 billion in 2021, which is a 79% increase from the $7.8 billion that was transacted in 2020.
This demonstrates the exact reason that authorities are so adamant that bitcoin exchanges put in place rigorous identity verification and KYC procedures: Cryptocurrency exchanges may lessen the risk of financial crimes being committed with the assistance of these procedures, and they can also lessen the possibility of fraudulent activities and improve the image of the market.
Contributes to the stability of crypto exchanges
The market for cryptocurrencies is notorious for its high degree of volatility. On the other hand, a portion of this volatility is generated by untraceable transactions that are illicit in their nature.
If bitcoin exchanges adopt know-your-customer (KYC) policies and other means of verifying customers’ identities, the market will become more stable. This will result in a rise in the value of the market, which in turn will entice more clients to shop there.
Robust KYC policies assure future compliance for organizations
The legal demands around KYC compliance are always shifting and developing, and many exchanges have had trouble adapting to these new rules. Because of this, bitcoin exchanges that have efficient rules regarding know your customer checks are now ahead of the curve. This indicates that rather than attempting to play catch-up, these cryptocurrency exchanges may instead concentrate on enhancing their rates of conversion and simplifying the process of making transactions.
Check also: What is a Secret Network (SCRT)?