Despite persistent volatility in the crypto market, the decentralized finance (DeFi) market continues to grow exponentially. According to Crypto.com, the global crypto population has grown by over 178% since the start of COVID-19 and is set to reach 1 billion by the end of 2022. With more users joining crypto exchanges facilitating fiat and digital currency transactions worldwide, there’s been a massive rise in Cybersecurity threats on different blockchain networks.
As a result, in 2019, the SEC, CFTC, and FinCEN termed these platforms as money service businesses (MSBs) which means that crypto exchanges must now follow anti-money laundering (AML) and Know Your Customer (KYC) rules as per the 1970 Bank Secrecy Act.
In this post, we’ll share everything you need to know about the role of KYC in Crypto so you can recognize its importance and ensure compliance from your end.
What Is Know Your Customer (KYC) in Crypto?
In the context of Crypto, Know Your Customer (KYC) is an identity verification and risk compliance process designed to screen and monitor Crypto customers engaging with different services and carrying out transactions. This AML/CFT regulation aims to create an accurate risk profile of each customer to detect malicious activities and prevent crimes like money laundering.
An Overview of the Crypto KYC Process
Here’s how different cryptocurrency exchanges carry out KYC to comply with regulatory bodies:
1. Data Collection
The first phase of KYC involves collecting a user’s personally identifiable information (PII), which typically includes their name, age, contact number, date of birth, and address.
2. Data Check
Next, the data is compared with the official government-issued identification, e.g., passport, driver’s license, utility bill, social security number, proof of income or residence, etc.
Finally, the user’s identity is verified against official databases that include a list of criminals, sanctioned individuals, and politically exposed persons (PEP) to reduce the risk of money laundering and malicious activities involving digital currencies.
The Importance of KYC for Crypto Transactions
The key purpose of setting up KYC in crypto platforms is to minimize the risk of fraud, identity theft, crypto-jacking, and other criminal activities. It helps exchanges understand who their users are as soon as they open new accounts, invest in crypto (Bitcoin, Ethereum, NFTs, tokenized funds, etc.), or apply for loans.
While most platforms are on board with the new regulations, many have pushed back against them as this move undermines the anonymous or decentralized nature of crypto transactions. Therefore, if you’re looking to create an account on an exchange, review their terms and conditions. These terms will tell you where they stand in terms of KYC regulations.
Other Benefits of Crypto KYC
Here are some of the key benefits of Crypto KYC for both users and exchanges:
Verifying user identities can help customers feel confident knowing that their exchange is taking the necessary measures to protect their accounts and minimize fraudulent activities.
Reduced Legal Risk
Due to the commercialization of DeFi and crypto assets, legal expectations are rapidly evolving. As a result, businesses will need to keep pace with the robust changes in policies and regulations. With the help of KYC, they can track and streamline transactions to ensure compliance with international bodies while reducing their risk of penalties and restrictions.
One of the biggest drawbacks in the Crypto market has been high volatility. This volatility exists mainly due to anonymous transactions on multiple exchanges that have led to rapid price fluctuations. However, KYC programs can help reduce the volatility and make the market more stable compared to the past.
So, there you have it – A simple guide on how Know Your Customer (KYC) works and its role in the Crypto industry. With the world of decentralized finance rapidly evolving, businesses and individuals need to keep up with the changes to ensure their assets are safe and comply with the regulations.
StaySAFU is one of the fastest-growing Crypto KYC enablers in the market that enables businesses to quickly equip their blockchain or DeFi project with a clean and secure KYC. So, get in touch with our team to learn about our process and other services/solutions.