KYC: What is it? Methods Crypto Exchanges Use to Prevent Money Laundering
If you’ve ever purchased an NFT or used a cryptocurrency exchange, you likely had to go through a know-your-customer (KYC) check to confirm your identity. The foundation of the global financial system is made up in large part of KYC checks, which help cryptocurrency businesses comply with anti-money laundering (AML) laws.
States and authorities can prohibit the use of cryptocurrency for crimes including human trafficking, money laundering, and terrorism financing by enforcing KYC rules. But for many proponents of cryptocurrencies, the notion that centralized bodies would oversee monitoring crypto transactions goes against the fundamental ideas behind the industry.
There is no doubt that KYC and AML regulations are a necessary component of the global financial system, and cryptocurrency exchanges are no different.
How do KYC and AML work, and why are they necessary?
The know-your-customer (KYC) processes locate and validate a customer’s identity. It is a multi-step procedure intended to stop the establishment and use of fake accounts.
Understanding the nature of customers’ activities, confirming the legitimacy of their source of funds, and evaluating the risks of money laundering linked to them are the goals of KYC.
To combat money laundering, know-your-customer regulations were first implemented in the United States in the 1990s. KYC requirements can range from just a name and email address to an address and proof of identification with a photo.
KYC policy proponents underline the necessity of safeguarding customers from identity theft and stopping fraud and money laundering.
Anti-money laundering (AML) regulations have existed since the Bank Secrecy Act of 1970, which is a considerably older statute. Criminals are discouraged and prevented from utilizing a bank’s or exchange services to launder cash or cryptocurrencies by AML standards.
The Tornado Cash coin mixing service was included in the U.S. Treasury Department’s sanctions list in August 2022 because of its role in cybercrime and money laundering.
Cryptocurrency and KYC
Exchanges for cryptocurrencies make up a sizable portion of the cryptocurrency ecosystem. US-based exchanges like Coinbase and Binance operate similarly to banks or stock exchanges, although not yet fully regulated. To adhere to KYC rules, US, Gemini, and Kraken implement “Identity Verification.”
“Coinbase is compelled to identify the users on our platform because we are a regulated financial services provider. To continue using our service, we require all users to confirm their identification following the Coinbase user conditions “ the website of the exchange states.
Customers who join up for a U.S. exchange must first give basic information. Typically, this data consists of a person’s name, email address, and birthdate. A customer must give extra information, like government-issued identification and a face scan, to fully utilize the exchange — for instance, to buy, sell, or trade more than a token amount of cryptocurrency.
Know-your-customer (KYC) laws are viewed by many privacy and cryptocurrency supporters as an invasion of privacy that creates honeypots for identity thieves and cybercriminals, although the goals of KYC and AML may be to safeguard customers and the financial system.
Another problem arises when a cryptocurrency corporation seeks bankruptcy relief and its documents are made available to the public as court records.
Doxxing, which involves disclosing a person’s identity and whereabouts, is a real worry for many. Some have suggested a more modern, Web3-friendly version of KYC that centers on reputation in addition to a quick identity check.
San Francisco-based Civic, which was founded in 2015, focuses on online identification for Web3. It offers both business and consumer solutions.
According to JP Bedoya, chief product officer of Civic, “uniqueness verification is one aspect of the suite of products that we provide for enterprise, which is called Civic Pass.
Civic.me, a platform that enables users to manage their online identity, NFTs, wallet addresses, and reputation from a single location on the blockchain, was also made available by the firm together with Civic Pass.
Astra Protocol, Parallel Markets, Polygon with Polygon ID, and other initiatives that attempt to offer Web3 KYC services all focus on providing a smooth client identification and compliance process
Even in an industry founded on the guiding principles of privacy and permissionless transactions, KYC remains a contentious topic. But as governments show a growing interest in Web3 and cryptocurrency activities, and as the legacy banking system integrates more and more with the cryptocurrency area, KYC is here to stay. Developers can at least make things as simple as they can.
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