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Recent data shows that prominent cryptocurrencies’ prices have gained $300 billion in the last few years. While the sector continues to transform, the increasing number of crypto exchanges indicates that this asset class will remain a part of the global finance system for the foreseeable future.

This lasting presence is solidified as regulatory bodies like the SEC, CFTC, and FinCEN categorize crypto trades on these platforms as Money Service Businesses (MSBs). Consequently, these exchanges are bound by anti-money laundering (AML) and Know Your Customer (KYC) regulations outlined in the Bank Secrecy Act 1970.

However, regulators are finding it increasingly difficult to ensure these crypto firms comply with KYC requirements. As some crypto enterprises grapple with the intricacies of KYC and its integration, this guide delves into what they need to understand about this policy and its pivotal role in preventing financial irregularities.

Understanding KYC In Crypto

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At its core, Know Your Customer is a precursor to AML measures. Whenever a company welcomes a new customer, it promptly initiates the KYC process to verify and authenticate the individual’s identity.

This procedural framework empowers financial institutions to assess customers’ risk profiles and predict their propensity for financial crimes. Hence, cryptocurrency exchanges must adhere to KYC as part of AML regulations.

Moreover, crypto exchanges deploy the KYC process to validate the accuracy of customers’ confidential information. They delve deeper into their transactions to verify the legitimacy of such transactions.

Despite encountering obstacles that sometimes require operational adjustments while integrating online KYC, cryptocurrency exchanges reap substantial benefits from regulatory compliance. Some of such benefits include:

Transparency and trust. It fosters transparency and bolsters consumer trust. Genuine validation of customer identities fosters a client-customer environment characterized by transparency, clarity, and unwavering consumer trust.

A heightened confidence in cryptocurrency exchange and demonstrable efforts to safeguard accounts emboldens customers to engage with the platform without apprehension.

KYC in crypto mitigates scams and curbs money laundering. Data shows over 80,000 crypto scams happened in 2022, indicating an astronomical surge of nearly 24,000% from 2016. Consequently, implementing robust Identity Verification (IDV) processes significantly curtails illicit activities, elevating the market’s reputation and integrity.

Minimizes legal vulnerabilities. As legal requirements evolve, robust KYC protocols provide crypto exchanges with clarity regarding how they should comply. Government-issued documentation reduces regulatory uncertainties by enabling Virtual Asset Service Providers (VASPs) to identify and possibly prevent instances of identity theft, money laundering and make accurate risk assessments.

KYC in Crypto boosts market stability. The cryptocurrency market’s inherent volatility often stems from suspicious and high-risk transactions. KYC programs featuring advanced IDV mechanisms can bolster the market’s stability and value growth.

Steps To Completing eKYC

The electronic Know Your Customer (eKYC) method supersedes conventional approaches for customers. It addresses consumer authentication requirements, including customer due diligence, ongoing monitoring, and onboarding. The steps include:

Document verification. The initial phase of e-KYC entails the automated assessment of scanned identification documents submitted by consumers. The Optical Character Recognition (OCR) technology extracts pertinent personal details from scanned ID documents.

These scans are subjected to AI-powered authentication by cross-referencing against predefined document templates.

Video authentication. eKYC leverages video-based authentication to enhance the spectrum of identity verification options. Through this approach, a professional validates the user’s identity by comparing their real-time video footage with their identity documents.

Regular screening. Mitigating fraud risks extends beyond the onboarding process, as some existing customers can be threats. Hence, monitoring client transactions helps financial institutions preempt fraudulent activities, including monitoring for Politically Exposed Persons (PEP) and global sanctions lists.

Will KYC Lessen Financial Irregularities In The Crypto Realm?

The KYC process in crypto plays a pivotal role in curbing money laundering and illicit financial endeavors. By soliciting personal information from clients, businesses can screen out fraudsters from using their services.

However, it’s essential to acknowledge that hackers may still attempt to compromise customer data from exchanges. Ultimately, the crypto community views KYC as a necessary measure, even though it is not flawless.

Nevertheless, KYC is one of the most effective means crypto exchanges can prevent scams and unethical conduct, bolstering the integrity of their services in an ever-evolving landscape.

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George Ward

By George Ward

George Ward is a crypto journalist and market analyst at Herald Sheets, known for his engaging articles on the latest digital currency trends. With a background in finance and journalism, he presents complex topics accessibly. George holds a degree in Business and Finance from the University of Cambridge.