The cryptocurrency industry has regularly faced a number of regulations over the past years. Crypto exchanges and marketplaces often opt for the bare minimum when it comes to the implementation of Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Due to this approach, the crypto industry has often come under fire for its compromised legitimacy and limited customer protection.
The inadequate verification practices have led to a number of identity theft, digital frauds, hacks within the crypto ecosystem. In early 2019, hackers stole about ~7000 BTC from Binance and the perpetrators were never caught and consequently, the funds were never returned. The possibility of remaining anonymous while creating an account and employing an exchange service provides hackers all the ammunition they need.
Why is KYC Compliance Needed?
Over the years, cryptocurrency has earned itself a bad name. Until recently, the cryptocurrency didn’t adhere to the same rules applied to “real money”. This led to the use of cryptocurrency on the black market. It was mainly because of crypto’s ability to be used anonymously or pseudo-anonymously. This meant that anyone could exchange value for things without having the concern about being linked with the transaction.
This type of privacy is a huge appeal for people involved in criminal and terrorist activities. Complete anonymity allows criminal activity to go unchecked. This not only gives criminals an easy platform, but it also poses a serious risk to other people’s privacy.
All these reasons stipulate the need for stricter verification checks. Regulators have demanded more robust KYC compliance. The majority of nations will not allow the use and exchange of cryptocurrency unless they are KYC and AML compliant.
KYC is the customer identification procedure which includes a number of steps and processes an organization employs to verify their customers. Customers are asked to submit their identity documents such as ID cards, residential address, contact number, driving license, date of birth, etc. The main reason for KYC in the cryptocurrency industry is to make sure incompetent people aren’t allowed to trade into crypto exchanges. Incompetent people refer to people having a criminal record, undocumented immigrants, etc. KYC identity verification also provides a complete database of information which can act as proof if any criminal activity happens in the future.
Anti-Money Laundering (AML) regulations include a number of procedures, laws, and regulations designed to monitor illegal transactions and associated activities. These activities can include market manipulations, misuse of public funds, tax evasion and other such associated activities. In order to be AML compliant, financial institutions have to conduct proper due-diligence procedures to identify and mitigate fraudulent activities.
In addition to KYC/AML regulations, cryptocurrency regulations are quite crucial as well. This is mainly because a huge number of funds flow through the market. Governments and financial institutions consider it a responsibility to monitor the transactions. Before these regulations, the transactions involving cryptocurrency were completely anonymous and untraceable. Therefore, these additions were imposed by various regulators and countries to combat money laundering and prevent terrorist funding.
Cryptocurrency exchanges have four general levels for KYC processes.
- Customer Acceptance Policy
With this policy, only those clients are accepted whose identity is established and verified after proper due diligence.
- Customer Identification Program
CIP is the process where financial institutions are obligated to verify the identity of individuals who want to carry out any financial transactions.
- Monitoring Transactions
Continuous monitoring of transactions ensures regulatory compliance which makes it possible to figure out suspicious activities.
- Risk Management
If any suspicious transaction is noticed, appropriate risk mitigating steps are taken.