Blockchain technology, at the heart of the crypto industry, is being hailed as a fascinating new development making money transactions clearer. Even though there has been some volatility, the crypto industry has grown over the past two years. And people who know about money think it will stay a sunrise industry for the foreseeable future. Every day, more investors join the business. This steady rise is getting the attention of policymakers and regulators worldwide. Since this is a new field, they closely monitor how it grows and develops.
Regulators have put in place several steps to reduce risks to the industry’s steady growth and make sure there are no sudden bumps.
Understanding Know Your Customer (KYC) for Crypto
The Know Your Customer process is a cornerstone of AML/CFT compliance regulations worldwide. It requires financial institutions to identify their customers and determine what kind of business they do.
The standard KYC process includes several due diligence steps and ongoing screening and monitoring as customers use a company’s services. KYC is important in the financial world because criminals use many ways to get around AML/CFT controls. By building a prosperous, accurate risk profile of each customer, financial service providers can find customers who are misusing their services and stop crimes like money laundering and terrorism financing.
Depending on their needs, your bank or exchange may ask you to prove who you are more than once.
Can You Do Business Without KYC?
Yes, not all exchanges have made it so that you must go through the Know Your Customer (KYC) process before trading. But there are fewer and fewer of them. And there’s no problem with getting your KYC done so you can trade freely. It could help you later when you want to make a complaint or fix a problem.
What are the Benefits of Know Your Customer (KYC) in Crypto?
Even though KYC regulations bring operational changes and challenges, crypto exchanges stand to gain a lot by making sure they follow the rules, including:
Better Customer Trust and Transparency
Users are more likely to keep using your service if they trust that your crypto exchange is taking proactive and preventative steps to protect their accounts.
Reduced Potential for Money Laundering and Other Scams
Forbes says there were more than 80,000 cases of cryptocurrency fraud in the United States in 2017. This is a 24,000% increase from 2016. Robust identity verification can reduce fraud and improve the market’s reputation.
Less Legal Risk
Since legal requirements are constantly changing, companies can stay ahead of the curve by implementing strong KYC policies. Instead of trying to catch up, they can focus on improving conversion rates, making transactions more accessible, and ensuring they are in line with changing international rules. By showing KYC due diligence, companies can lower their risk of being sued or fined by the government.
Enhanced Stability of the Crypto Market
The crypto market is known for its high volatility, which is partly caused by anonymous transactions that could be illegal. As part of Know Your Customer (KYC) programs, more identity checks can help keep the market stable and increase its value.
Risks of KYC at a Crypto Exchange
KYC compliance in cryptocurrency is complicated because regulations change, and criminals use new ways to steal money. So, when building and implementing their KYC solution, cryptocurrency exchanges should be aware of the following vulnerabilities and risks:
Anonymous Transactions: Money launderers can hide some of their online identities when they exchange cryptocurrency. So, exchanges should try to use digital controls to help with their identity verification process. For example, they could get biometric customer information like scans of their faces, voices, and fingerprints.
Speed: Cryptocurrency transactions can be done in a matter of seconds, often faster than AML/CFT controls. Before funds are sent to user wallets, exchanges should ensure that their AML/CFT checks and monitoring processes can be finished.
Structured Transactions: People who try to launder money may try to get around reporting requirements by structuring their transactions so that they are for small amounts and happen across multiple accounts. Cryptocurrency exchange platforms should ensure that their controls don’t let people make more than one account. They should also share information with financial service providers to find and stop structuring strategies.
Money Muling: People who want to launder money may try to take advantage of the weaknesses of cryptocurrency transactions. They can do this by forcing or paying third parties, called “money mules,” to use cryptocurrency exchange services on their behalf. Exchanges should try to find money mules by doing proper due diligence and finding customers whose profiles don’t match their wealth or what would be expected financially.
Negative Customer Experiences: In addition to the regulatory risks, crypto exchanges with insufficient or inappropriate Know Your Customer (KYC) procedures risk making their customers’ service experiences worse. Under a risk-based approach, Know Your Customer (KYC) lets exchanges make detailed risk profiles and then change their AML/CFT controls to fit each person better. Keeping this in mind, KYC is a way to improve the experience for customers who aren’t as risky, ensuring fast and efficient service where AML/CFT checks aren’t needed.
Why do Most Crypto Exchanges now have to do KYC?
KYC is now required by most crypto exchanges because, according to federal rules, they are MSBs (money service businesses). Even though these businesses have always dealt with money in some way, early market skepticism caused controls around exchanges to be slow to catch up, especially since trading was challenging and frustrating for most people.
But the market has become more diverse, and the amounts of digital currency being traded has grown. This has made crypto exchange development services more popular.
How Hard is it for Crypto Exchanges to do KYC?
Along with new KYC requirements for crypto exchanges in the US, companies also need to keep up with changes in regulations worldwide. This is because cryptocurrencies like Bitcoin are used all over the world. Because these currencies are anonymous and are backed by the public ledger of blockchain security, it is easy to trade them across international borders without having to do complicated calculations or have strict central bank oversight.
Because this market is primarily unregulated, countries like the Netherlands, Switzerland, and France have made it necessary for users to show ID. In the Netherlands, clients must prove they own their wallets and explain how they plan to use cryptocurrencies. In Switzerland, users must use verified documentation to prove they own non-custodial wallets. France, on the other hand, has banned all anonymous accounts.
As global regulatory requirements get more complicated, KYC processes like collecting customer data, verifying critical information, protecting personally identifiable information (PII), and more, can become complex and time-consuming.
Getting KYC for Crypto
KYC for Crypto is here to stay, and as the number and speed of cryptocurrency transactions rise worldwide, so do regulators’ expectations. Because of this, cryptocurrency exchanges can’t wait to use and integrate the best-of-breed KYC solutions.
Regarding KYC, crypto companies are best served by offering solid international coverage, a streamlined user experience, automation, and multiple verification types for risk profiles and use cases. Persona is the only identity platform that gives businesses the building blocks they need to build their ideal Know Your Customer (KYC) program and automation and orchestration tools to speed up the whole process from start to finish.
