What Is KYC Verification, And Why Do Crypto Exchanges Require It?: You must first validate your identity before you can begin bitcoin trading. You’ll usually be requested to go through the know-your-customer (KYC) process when you open an account with a crypto exchange. This is a basic identification verification process that all major cryptocurrency exchanges demand of anyone who wants to trade cryptocurrency.
KYC, or identity verification, is required by major cryptocurrency exchanges throughout the world, just like it is by other financial institutions, in order for consumers to have ongoing access to their services. Why is KYC verification required, what advantages does it provide bitcoin dealers, and how does it vary from anti–money laundering regulations? Is KYC verification in public cryptocurrencies counterproductive to the goal of decentralization? In this essay, we’ll answer these and other questions.
What is KYC (Know Your Customer) – Identity Verification?
“KYC” stands for “know your customer” or “know your client.” It is the process of verifying a customer’s identification, usually by a financial institution. Identification verification necessitates the use of information that may, of course, be used to verify your identity, such as a valid ID card, utility bills with your home address, a passport, and so on. The standards for identification documents differ from institution to institution and even region to area.
Customers are often requested to produce identity verification papers when starting an account and, on occasion, when the user’s personal information has changed. You may not be able to use all of the functionality of a cryptocurrency exchange if you do not finish the KYC process. Binance, for example, enables clients to open accounts, access basic functionalities, and conduct limited transactions without presenting KYC information. Customers must complete the KYC verification procedure in order to acquire full access and increase greater deposit and withdrawal limits.
What Is the General KYC Process?
KYC processes may differ depending on the type of firm, but they always serve the same purpose. KYC includes fundamental functions such as data collecting and verification. Customer due diligence is also required, as is continual monitoring.
KYC verification is often divided into three components and processes:
1. Identification Program for Customers
This is the first and most basic KYC procedure. It basically entails gathering and verifying client information. For banks, this step normally occurs during the enrolling process. It comes after registration for bitcoin exchanges and other less stringent financial organizations.
2. Due Diligence of the Customer
After confirming the customer’s identification, a corporation may elect to delve further by doing a background check on the consumer. The purpose of the background check is to determine risk. If the consumer has previously been reported for financial wrongdoing or is under investigation, the background check will reveal this.
3. Ongoing Monitoring
Ongoing monitoring ensures that KYC information is up to date and allows the system to evaluate transactions that look suspicious. Multiple significant transfers to a nation on the US terrorism watch list may be marked out for a bitcoin exchange. Depending on the findings of the inquiry, the exchange may suspend the customer’s account and notify the appropriate regulatory and law enforcement organizations.
Why is KYC Mandatory for Most Crypto Exchanges?
Know Your Customer (KYC) standards are required for large cryptocurrency exchanges to ensure compliance with regulatory norms and legislation.
The purpose of KYC is to prevent illegal activities and to detect suspicious behavior as soon as feasible. These data are used by cryptocurrency exchanges to track transaction patterns and guarantee secure and compliant transactions.
A cryptocurrency exchange may be held accountable if a user gets away with committing a crime owing to a lack of KYC verification. Major exchanges will now want to stay anti-money laundering (AML) compliant.
Nevertheless, while KYC and AML are commonly used interchangeably, they do not refer to the same entity.
What is the Difference Between KYC & AML?
The know your customer rules are merely one component of a bigger umbrella phrase known as anti-money laundering (AML). AML encompasses a wide variety of regulatory activities aimed at preventing money laundering. Software screening, record keeping, and criminalization are some of the other AML procedures. KYC is just an AML procedure that entails identity verification and increased due diligence.
KYC, AML, and all other regulatory processes make it more difficult for organized criminals and terrorists to conceal their unlawful operations. They will be unable to make monies obtained illegally seem legitimate. While this is an advantage, some members of the cryptocurrency industry are divided on whether KYC compliance should be made necessary for exchanges.