What is KYC in Crypto, and why do crypto exchanges require it?

The global trend of regulating cryptocurrency exchanges will make AML compliance mandatory

18 Aug 2022 | 5 min Share on Facebook Twitter share Share on Viber LinkedIN share Email share

What does KYC in cryptocurrency mean?

KYC is the initial level of anti-money laundering (AML) due diligence. KYC procedures are undertaken when a financial institution (FI) onboards a new client to identify and verify the customer's identification. These processes allow financial institutions to assess the consumer's risk profile based on their proclivity for financial crime.

Because cryptocurrency exchanges and wallet providers are expected to be regulated similarly as financial institutions, they must incorporate KYC procedures into their anti-money laundering (AML) operations.

KYC is the procedure that cryptocurrency exchanges must follow in order to:

  • Confirm the personal details of their end users and consumers.
  • Improve their grasp of their potential clients' actions and confirm their legality.
  • Determine the likelihood that their consumers offer a money laundering danger.

The goal of  KYC legislation is to combat identity theft and fraud by requiring businesses to gather and verify vital customer data. Financial institutions (FIs) frequently require consumers to undergo KYC procedures when opening new accounts, applying for loans, making investments, and doing other significant activities. Typically, these procedures include inquiries for identifying information — such as driver's licenses, Social Security numbers, and other financial statements — verification, and the preservation of this information to assure compliance in the case of an audit.

Despite the fact that cryptocurrency exchanges are now subject to the same laws as their traditional financial counterparts, some have opposed restrictions, stating that the collection of this data threatens the anonymity of cryptocurrencies. Other exchanges ask consumers to provide identification information when opening accounts, but instantly grant trading rights without confirming this information. Privileges are only canceled if the KYC checks uncover something concerning.

Nevertheless, despite efforts to avoid or evade KYC cryptocurrency restrictions, the expanding cryptocurrency sector, and increasing public appeal practically ensure that KYC criteria will not only be expanded for exchanges but also lead to heightened regulatory enforcement.

Can you trade cryptocurrencies without a KYC?

Several exchanges still do not need KYC, however, they are few and far between due to tight AML rules. Despite the hazards, crypto users who are highly concerned about their privacy continue to seek out non-KYCt exchanges.

 

Trading on a non-KYC market has a number of dangers, including:

 

  • Security: Non-KYC exchanges are frequently less secure than KYC exchanges due to lax AML regulations, making them more prone to cyberattacks, fraud, and other criminal behavior.
  • Liquidity: Because non-KYC exchanges are smaller and cater to a smaller client base, they frequently have lesser liquidity than KYC exchanges, making it difficult to locate buyers or sellers when you wish to trade, resulting in higher costs.
  • Fees: Because they must mitigate the risk of fraud and other criminal behavior, non-KYC exchanges frequently charge greater fees than KYC exchanges.

So, while it is feasible to trade cryptocurrency without KYC, it is typically not advised. When using a non-KYC exchange, it is critical to take extra precautions to secure one's identity and personal information.

What are the benefits of Crypto KYC?

Despite the operational difficulties posed by KYC rules, cryptocurrency exchanges stand to gain much from regulatory compliance, including: ‍

Lowered legal peril

Businesses can limit the likelihood of legal issues and regulatory penalties by undertaking KYC due diligence. Strong Know-Your-Customer (KYC) practices enable bitcoin exchanges to remain ahead of the curve as regulatory requirements evolve.

Instead of striving to comply with new regulations, companies may concentrate on boosting conversion rates, streamlining transactions, and ensuring compliance as international standards evolve.

Increased trust

Users are more likely to continue using a service if they believe the bitcoin exchange takes aggressive precautions to protect their accounts. Identity verification is ultimately in the best interests of consumers and enterprises.

Market stability

Due to the often dangerous nature of anonymous transactions, the bitcoin market may be very volatile and unpredictable. KYC systems that involve increased identification verification aid in market stability maintenance and investor trust building.

Reputational harm control

KYC-compliant exchanges are in a better position to avoid fraud and protect their reputations in the case of a hack or data leak. Exchanges that apply KYC can swiftly freeze or terminate accounts that may be associated with illicit activities.

Reduced fraud and money laundering risks

KYC compliance is vital for cryptocurrency exchanges when you consider the figures. In 2021, $8.6 billion worth of bitcoin was laundered, highlighting the significance of industry compliance.

Why is KYC in Crypto important?

Bitcoin and other blockchain-based cryptocurrencies are not governed by governments or central banks, enabling users to spend money instantly, securely, and with little transaction costs. As a result, transactions between individuals are often quick and anonymous, taking place on the respective blockchains.

The inherent characteristics of cryptocurrencies, especially its speed and anonymity, make it an alluring choice for criminals seeking to circumvent standard AML rules. Criminals must discover a means to convert "dirty" money into cryptocurrencies and then pay it out in order to launder it. This makes bitcoin exchanges suitable locations for money laundering by criminals.

It is impossible to overstate the significance of KYC compliance for bitcoin exchanges. Not only does it increase investor trust, but it also minimizes the likelihood of fraud and money laundering.

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