Since the rise of Bitcoin (BTC), Cryptocurrency transactions were positioned as an absolutely anonymous and safe environment. At first, this was considered easy, but when digital assets began to rise in price and large investors became interested in a new area, the situation changed radically. Further, the more centralized cryptocurrency exchanges introduce requirements for mandatory verification of clients. Money laundering is another problem for regulators with cryptocurrencies. As a result, KYC becomes important in crypto trading.
There are plenty of crypto trading platforms worldwide that offer cryptocurrencies but now they also need to enforce KYC (know your customer) method for every user. Though the enforcement of KYC on centralized exchanges (CEX) is against the idea of Bitcoin founder Satoshi Nakamoto’s vision of decentralization and freedom. Here we will try to understand, why KYC/AML is needed and becomes mandatory on the crypto platforms.
KYC Procedure in Crypto
Know Your Customer (KYC) is a procedure that obliges all financial organizations and institutions to identify and verify the identity of each client. Moreover, this must be done before the client can carry out any financial transactions.
The KYC procedure allows the platforms and regulators to track down the location and activity of the traders. Unpleasant, but necessary, because in practice, anonymity and lack of control turn into many temptations and impunity for crimes. The cryptocurrency world is extremely attractive but not safe from scammers and hackers.
In reality, even the most dangerous criminal outwardly does not differ in any way from a law-abiding citizen. It is important for reputable companies to avoid even the theoretical possibility of cooperation with terrorists, scammers, and other dark personalities. KYC is one of the measures to protect against the risks of such cooperation.
Method of KYC
Since crypto exchanges operate in the legal field and value their reputation, they also agree to accept the general rules of the game. Crypto exchanges themselves determine the stages of verification and the amount of information about the user. Today KYC has become more important in crypto trading and it’s mandatory for the crypto trading platforms in many countries. As a rule, it is mandatory to request:
- Passport data.
- Residence address.
- Phone number.
In addition, the crypto exchanges may ask for confirmation of the phone number or e-mail during the KYC procedure. Some platforms ask for selfies with documents and utility bills. Popular exchanges like Binance have taken many steps for strong KYC enforcement. The same is now followed by other companies that offer crypto trading.
The larger the amount that you plan to deposit on the exchange, the more information about you will be required. Usually, there are several standard KYC levels on exchanges, and in most cases, it is enough for clients to limit themselves to the basic or maximum second level.
Anti Money Laundering (AML)
KYC is only part of a wider range of anti-crime anti-money laundering (AML) measures. In the full version, the name of this set of measures sounds even more intimidating: “Combating money laundering, countering the financing of terrorism and financing the creation of weapons of mass destruction.”
And it would seem, but what does crypto-exchange have to do with it? Moreover, the information in the blockchain is available for viewing by everyone? The amounts of transactions and the addresses of their participants are visible in the blockchain. It is quite possible to trace the movements of each coin, but the names of its former owners and the purpose of the transfers cannot be so easily identified.
And any transaction can theoretically be associated with hacker attacks, extortion, or something worse. When buying crypto on an unregulated platform, the buyer runs the risk of buying so-called “dirty” coins, for example, stolen or received for the sale of a large consignment of drugs.
Giant crypto exchanges like Binance have taken important steps to prevent money laundering on their platform. AML policy is precisely aimed at preventing the movement of illegally mined coins. In addition to KYC, the set of measures includes:
- Verification of bank cards.
- Transaction monitoring.
- Risk assessment.
- Crypto compliance etc.
Reputable exchanges are inclined to the need for direct or indirect compliance with AML/KYC. Today, almost every crypto exchange asks for KYC from its customers when they create their account on the exchange. Without KYC some of certain functions can’t be used by the traders on exchanges.
Pros and cons of AML/KYC
Every asset or investment has two sides, so AML/KYC is certainly no exception. Consider them from the side of both the exchange and the client. Here we are pointing out some pros and cons of AML/KYC.
For the exchange:
- The platform is sure that there are no terrorists, drug dealers, and other undesirable persons among its clients.
- Only “clean” coins enter the exchange.
- The platform is legally compliant, trusted, and able to work with clients from different countries.
- The platform can work with fiat currencies and directly cooperate with Visa and Mastercard.
- The platform incurs additional costs for the purchase of software, hiring, and training of specialists, and ensuring the security of data storage.
- Regularly undergoes audits.
- KYC/AML is against the idea of decentralization and anonymity.
Security and great opportunities inevitably come at a price. But still, it is much cheaper than paying for carelessness. And not only money.
- Maximum trading security, all funds on the exchange are legal.
- Minimal costs when performing crypto-fiat operations.
- Guaranteed damages in case of hacking or technical failures on the platform.
- Protection against unauthorized use of a bank card.
- Additional time spent on data validation.
- Discomfort from the need to disclose personal data.
Many users are convinced that verification violates one of the key principles of the crypto world – anonymity. That is absolutely true in the decentralization sense. However, this is a forced measure, which is needed as an indicator of the security of cooperation with the platform. Some countries may not allow crypto exchanges to run without AML/KYC.
We live in an imperfect world, where the law-abidingness of a single person does not guarantee his protection from illegal actions by other people. It is also in no way obvious to others. AML/KYC is aimed at increasing security in the world of finance and is really needed, although they create some inconvenience.