Crypto exchanges have now started applying situational know your customer (KYC) to fight against illegal activities without needing to compromise user experiences and financial freedom.
Know your customer (KYC) is a due diligence and security process that gets implemented by financial institutions to validate the identity of their users and determine the possible risks of illegal activities like terrorism financing and money laundering.
By helping to protect firms from doing business with entities that mostly engage in illegal activities, KYC procedures increase general financial security and regulatory compliance.
KYC verification also applies to a wide range of businesses, including decentralized and online initiatives. Platforms start utilizing the KYC process during the initial customer onboarding process and maintain it throughout the whole business relationship to monitor any suspicious activities.
The KYC process features multiple key components, including the verification of customer credentials, the creation of a risk profile, and the detection of any suspicious activity.
Why Is KYC Important In Keeping Crypto Exchanges Safe?
The cumulative value held by illegal addresses in crypto hit an all-time high of $20.6 billion in 2022, marking a significant surge from $18.1 billion in 2021. The report also indicates that anonymity and lack of security contribute to illegal crypto activities.
Further increasing the severity of the issue, a study found that 56% of virtual asset service providers (VASPs) globally showed inadequate compliance with anti-money laundering (AML) regulations.
The statistics highlight the critical need for KYC measures to fight illegal activities. Emerging as an important tool in protecting crypto exchanges, KYC practices directly resolve the issue of anonymity that mostly creates room for illegal activities. Exchanges that use KYC boost transparency by preventing the hiding of funds acquired via illegal means. This minimizes the risk of criminal activities like financial support of terrorist organizations and money laundering.
In the volatile crypto space, where investor confidence can massively impact market stability, an exchange’s KYC application shows that it cares about security. By mandating the offering of personal information and documents for validation, the process boosts a safer environment, helping deter the misuse of its services for illegal operations.
KYC also assists in controlling reputational damage that might arise from hacks and data breaches by allowing exchanges to take quick action against any suspicious activity.
In the volatile crypto space, where investor confidence can considerably impact market stability, an exchange’s KYC application highlights that it cares about security. By mandating the submission of personal information and documents for validation, the process boosts a safe environment, deterring the misuse of its services for illegal activities.
KYC also helps in controlling reputational damage that may arise from hacks or data breaches by allowing exchanges to react quickly in case they discover any suspicious activity.
How The KYC Process Works
The KYC process on crypto exchanges can feature multiple basic steps developed to authenticate customer identity and assess possible risks of illegal activities:
- Verification of customer data – the exchange validates the data by requesting an official document, such as a driver’s license, passport, or birth certificate. Some of the exchanges need users to present official documents accompanied by a selfie.
- Liveness Check – some of the exchanges request a liveness check to determine whether the information belongs to the real existing user.
- Customer Risk Rating – Based on the collected and verified information, exchanges conduct risk ratings for every customer.
- Constant Monitoring – Transactions and accounts are continuously reviewed to spot several triggers that might indicate illegal activities promptly.
How KYC processes are implemented may vary subject to exchanges’ particular compliance policies, regulatory needs, and operational practices.
Different KYC Practices
KYC practices widely vary across many platforms and jurisdictions and reflect different regulatory needs, risk management strategies, and customer service approaches. Some of the applications of KYC include:
- Mandatory KYC – most crypto exchanges need KYC verification in the initial registration process for users to access all services.
- Non-mandatory KYC – Some platforms need verification based on trading volumes or account activities.
- High-value transactions – platforms might apply advanced KYC and due diligence processes for transactions that seem to be high-value or possibly suspicious.
- Withdrawal or transfer limits – digital platforms may need identity verification for huge withdrawal requests.
- Geographic needs – Users in nations with strict financial regulations might need to undergo more strict KYC verification than other users.
On that note, the diverse applications of KYC on crypto exchanges and financial platforms highlight its role in complying with global regulatory standards, enhancing security measures and designing customer experiences within the digital finance space.
