Introduction
Know Your Customer (KYC) is a process in which a financial service provider checks and verify their customers. This is done as a part of AML (Anti-Money Laundering) and Compliance in order to ensure customer due diligence.
The Know your customer process is to combat wrongful activity by verifying customer information. This will help financial institutions to mitigate the risk, this has become compulsory in the centralized exchanges. However, some critics say that this process affects the anonymity and decentralized nature of Blockchain technology.
KYC is a compulsory process for financial institutions should fulfill. Basically, This process helps to check money laundering and other illegal activities on any platform. Know Your Customer is a mandatory measure in anti-money laundering regulations, especially in the case of cryptocurrencies.
What is KYC?
If a customer opened an account with a bank or a centralized cryptocurrency exchange, he will definitely come across the KYC procedure. These institutions are required to collect information and verify their customer’s identities via documentation of authorized official Identities. These KYC policies help to fight against money laundering, terrorism financing, fraud, and illegal activities of funds.
In the KYC process, the financial institutions take customers’ details typically identifications before allowing them to do financial transactions. In some cases in cryptocurrency exchanges, accounts with very limited serviced can be created without KYC.
For a KYC, usually, users may be asked to provide:
• Government ID
• Driving license
• Passport
KYC is also important to confirm the location and address of the customers.
These documents will provide the basic information of the user, But more information is required to understand the taxations terms of the particular location of the user. Financial institutions often need to recheck the user identities at regular intervals.
Who regulates it?
KYC is based on region, their regulations differ from country to country but in the case of international compliance, the basic information is needed. The present AML and KYC processes are covered by the 2001 Patriot Act and the Bank Secrecy Act in the U.S. The EU overlaps a lot with the US regulations but they have built their own regulations. The Financial Action Task Force (FATF) coordinates multinational cooperation at a global level, on the regulatory framework.
KYC in crypto:
Cryptocurrency is well known for its pseudonymous nature. It is considered as it has been used for money laundering and illegal funds transfer and tax evasion purposes. By regulating the cryptocurrency exchanges it will help enhance the right usage of it and make sure the taxes are paid. There are different reasons why KYC is needed in the cryptocurrency industry:
• As we know the transactions in the Blockchain are irreversible, there is no middle man involved to help if a user makes any mistake. In this case, the funds may be stolen or mistakenly sent to other addresses.
• Cryptocurrency is pseudonymous anyone can use and transact without submitting any personal details and they open a crypto wallet.
• A cryptocurrency like Bitcoin was first started in the dark market, however now still many countries have proper regulations for it.
A customer should have to submit a KYC these days in the centralized exchanges, in order to trade or save cryptocurrencies. But KYC has an impact to keep the user funds safe and protecting against crime.
Benefits of KYC:
KYC is a good concept to prevent illegal activities but the benefits are not all obvious. However, it’s not only about restraining illegal activities and but it also can improve the financial system in many ways:
• In KYC-enabled Institutions can easily estimate their risk by evaluating users’ identity and financial history. This will help in lending and enhance risk management factors.
• It will help in case of identity theft and other financial fraud.
• KYC’s major benefit is that it reduces the risk of money laundering by identifying at first in case if they occur.
• All over it increases the trust and security of a financial institution.
Decentralization and KYC:
Cryptocurrencies were built with the idea of keeping them decentralized and enhancing financial freedom for an individual. As mentioned in the article above, anyone can create a wallet and hold cryptocurrencies without any KYC or personal details. However, this has become a major transaction method for laundering money and illegal activities.
Financial institutions are obliged to KYC checks on their customers. This can be majorly practical in the case of the fiat to crypto converting exchanges. While these processes are not always required in decentralized exchanges, which use only cryptocurrencies as a medium of exchanges. This industry has both silent investors as well as active investors who appreciate the values and utility aspects of cryptocurrencies.
Closing thoughts
However the cryptocurrency transactions are not totally anonymous, but the transactions can be tracked by their particular addresses. In the case of KYC, It’s one of the most important processes to fight against illicit activities like money laundering and other financial frauds. KYC checks can easily help financial institutions to operate under regulations as well as they will help to track down fraudulent activities and safeguard the user funds.