KYC in the crypto market (know your customer)?
KYC is a general regulatory requirement that financial service providers must comply with. These controls are mainly aimed at combating the financing and money laundering of illegal activities. KYC is a key measure in anti-money laundering regulations, making it an important security safeguard, especially for cryptocurrencies. Financial institutions and service providers such as Binance are increasingly required to implement robust KYC procedures to protect customers and their assets.
What is KYC?
If you've opened an account with a cryptocurrency wallet, you'll probably need to write a KYC check. KYC requires financial service providers to collect information to verify the identity of their customers. This can be, for example, through an official ID card or bank statements. Similar to AML regulations, KYC policies help combat money laundering, terrorist financing, fraud and illegal funds transfer.
KYC is usually a proactive rather than a reactive approach. Most financial service providers receive customer information during the registration process before they can conduct financial transactions. In some cases, accounts can be created without KYC, but they have limited functionality. Binance, for example, allows users to open an account but restricts trading until KYC is completed, we write more about this topic in this post.
While completing KYC, you may be asked to provide:
- Government identity, general register
- Driver's license
- Passport
In addition to confirming the customer's identity, it is also important to confirm their location and address. Your identity documents will provide basic information such as your name and date of birth, but additional information is required to establish your tax residency, for example. You may need to go through more than one KYC step. Financial service providers often have to re-verify the identity of their customers at regular intervals.
Who regulates KYC compliance?
KYC norms vary from country to country, but there is international cooperation on the basic information required. In the US, the Bank Secrecy Act and the Patriot Act of 2001 established most of the AML and KYC processes that exist today. EU and Asia-Pacific countries have developed their own rules, but they overlap a lot with US regulations. The EU Anti-Money Laundering Directive (AMLD) and the PSD2 regulations provide the basic framework for EU countries. EU. At the global level, the Financial Action Task Force (FATF) coordinates multinational cooperation under regulatory conditions.
Why do we need KYC in encryption?
Due to the pseudonymous nature of cryptocurrency, it is often used for money laundering and tax evasion. Better regulation of cryptocurrencies improves their reputation and ensures taxes are paid where they belong. There are three main reasons why KYC checks are needed in the cryptocurrency industry:
1. Blockchain transactions are irreversible. There is no administrator to help you if you make a mistake, meaning funds can be stolen or moved and cannot be recovered.
2. Cryptocurrency is very anonymous (pseudonymous). You don't need to provide any personal information to open an encrypted wallet.
3. Regulation is still uncertain when it comes to cryptocurrency taxation and legality in many countries.
Although KYC increases the time required to set up an account, it has clear advantages. The average customer won't necessarily be able to see them, but KYC has a significant impact on keeping your funds safe and fighting crime.
What are the benefits of KYC?
The benefits of KYC are not all obvious. However, it is much more than fighting fraud and can improve the financial system as a whole:
1. Lenders can more easily assess their risks by establishing a customer's identity and financial history. This process leads to more responsible lending and risk management.
2. Fight identity theft and other types of financial fraud.
3. Reduces the risk of money laundering, which occurs primarily as a preventive measure.
4. Increases trust, security and accountability of financial service providers. This reputation affects the financial sector in general and can stimulate investment.
KYC and Decentralization
From the beginning, cryptocurrencies have focused on decentralization and freedom from intermediaries. As mentioned, anyone can create a wallet and support encryption without having to provide any personal information. However, it is precisely for these reasons that encryption has become a popular method of money laundering.
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