Cryptocurrency is an industry that has captivated people for over a decade — the burgeoning digital currency has revolutionized how we perceive and interact with money, and challenged the traditional financial systems.
However, this intriguing digital playground has a dark side — money laundering, terrorist financing, scams, fraud, identity theft, and other financial crimes. Know your customer (KYC) is a process that many crypto exchanges have implemented in order to combat these illicit activities. But is that actually a good thing? In this brief guide to crypto in KYC, we’ll explore the answer to that question and help you understand why KYC is important for the crypto industry to continue to thrive.
What does KYC mean in crypto?
In the crypto industry, KYC is often considered synonymous with user identification. Crypto KYC requirements are mostly centered around making sure that users are who they say they are. KYC measures for users often include:
- Providing personal data like their full legal name or home address.
- Submitting government-issued identification such as a passport or driver’s license.
- Presenting proof of address via a utility bill, bank statement, or other official document.
- Completing biometric verification by taking a selfie or short video of their face to make sure they match their identification.
Crypto exchanges collect this data and make sure that it is all consistent with who the user claims to be. Additionally, exchanges often perform further KYC checks, like:
- Asking for additional information from users like source of funds or the purpose of their cryptocurrency transactions.
- Screening users against sanctions and watchlists in order to catch individuals or entities that are subject to sanctions or involved in illegal activities.
- Completing a risk assessment using these data points to determine how risky each user is — and then limiting their transactions or account activity accordingly.
- Performing ongoing monitoring of user accounts in order to flag suspicious activity.
Why is KYC important in crypto?
In short, KYC is important in the crypto industry in order to prevent criminal activities and provide safety and security for users. When using a KYC crypto exchange, users can feel more confident that the people they are dealing with are not bad actors. With non-KYC crypto exchanges, users are left exposed to potential fraud and scams since there is no process in place to screen out users with ill intent.
Ultimately, KYC protects crypto exchanges by identifying and curbing potentially illegal activities. Many countries have passed regulations that require KYC as part of their anti-money laundering (AML) and counter-terrorism financing (CTF) measures.
What are the pros and cons of KYC in crypto?
KYC implementation in the crypto industry is a controversial subject. The industry itself is rooted in anonymity, a philosophy that can seem at odds with collecting users’ personal information and verifying it. Let’s take a deeper look at the pros and cons of KYC to understand the full picture of this polarizing process.
What are the advantages of KYC verification?
Many exchanges and users prefer KYC in crypto due to the:
- Reduced risk of criminal activity like fraud, money laundering, and other malicious activities.
- Enhanced security for users as identity theft and scams are made more difficult.
- Compliance with regulations provides legal protection for exchanges, legitimizing the crypto industry.
- Establishing trust and credibility for crypto exchanges, making them more attractive to users and investors.
What are the disadvantages of KYC verification?
The reasons why some avoid KYC crypto exchanges are:
- Privacy and data breach concerns since KYC exchanges collect and store sensitive personal information.
- Centralized entities control user data, and this is often seen as a direct violation of the decentralization principles that cryptocurrencies were initially built upon.
- Inaccessibility and unnecessary barriers for users who don’t have access to identification documents or don’t want to go through a time-consuming KYC process.
- High cost of implementation and maintenance of KYC procedures can lead to exchanges increasing fees for users.
It’s worthwhile to consider the pros and cons of KYC in crypto as both sides of the (bit)coin are valid. However, with the right KYC implementation, many of the potential downsides can be mitigated, striking the proper balance between security and user privacy.
How to do KYC for crypto properly — partner with Onfido
Here at Onfido, we can help your crypto exchange implement KYC with the highest degree of security and accessibility, all while working within your budget. Our comprehensive suite of KYC and AML tools enables you to achieve and maintain compliance while providing a streamlined experience for users. You’ll be able to:
- Conduct data and ID record checks.
- Screen for sanctions, PEP, and adverse media.
- Deliver real-time document and biometric verification.
- Uphold global KYC/AML compliance standards.
- Use an award-winning AI-powered identity solution.
- Navigate compliance and detect fraud.
- Minimize onboarding cost and complexity.