Money laundering is one of the main financial problems all over the world in 2021. However, there are several ways to solve this problem. Among the most popular solutions, there are AML services that help to track your transactions and the implementation of KYC. Let’s consider why KYC is so important for crypto exchanges.
Trustful and transparent transactions
The principle of trustworthiness is very important for the owners of cryptocurrencies since crypto exchanges can have a rich history of hacking attacks and scandals.
Due to the implementation of KYC procedures, exchanges can reach a high level of trustworthiness. Identity verification systems help identify customers of exchanges and differ frauds from legitimate customers.
While KYC procedures are used, a new customer of the crypto exchange can be confident in trustworthiness and protection against criminals. This is especially essential for P2P exchanges where customers trade with each other without any third parties.
The risk of financial crime
There is a huge number of illegal activities related to cryptocurrencies, starting from tax fraud and ending with corruption, terrorism funding as well as online banking hacks. Financial illegal operations reach around $ 1, 4 to 3, 5 trillion a year worldwide. Around $2 trillion is laundered. Crypto exchanges are a space for big financial crime. In 2019, crypto exchanges and their users were hacked on 4, 26 billion. There are users with different intentions using the services of exchanges. This can cause hacking attacks, scams as well as phishing. For instance, hackers have stolen $ 40 million on the largest crypto exchange Binance.
In order to prevent hacking attacks and scams, the KYC policy is implemented in crypto exchanges. According to the regulations published on 20 July 2021, all cryptocurrency exchanges need to implement KYC verification services enabling them to identify the personality of each customer.
KYC services allow reducing the chances of financial crime via identification and verification processes. Due to these procedures, crypto exchanges can avoid criminals and clients with a high level of risk while protecting against illegal activities related to the exchanges or crypto wallets. Let’s consider what KYC means and its main functions.
What is KYC?
KYC means “know your customer”. It aims to verify a customer’s identity. The verification process is collecting the user’s information, including the customer’s identity, a valid identification card, utility bills, etc.
During the registration process, clients of exchanges are required to provide a service with all the KYC information. In addition, you need to give your identification information while your data is changed.
Without providing a service with all the necessary information, customers won’t get access to all the features of the cryptocurrency exchange. For instance, the cryptocurrency exchange Binance provides clients with the possibility to create accounts, use the main functions, and process a limited number of transactions without KYC identification. If you want to get access to the full functionality of the service and enhance deposits and withdrawal limits, you need to provide a platform with all the KYC information.
Which processes does KYC consist of?
KYC procedure consists of two main processes, including data collection and verification.
There are main processes involved in the KYC procedure:
Customer Identification Program (CIP)
This is the main part of the KYC procedure. During this part, all the customer data are collected and verified. This process comes after the registration of customers at the exchange.
2. Customer Due Diligence (DD)
After the verification of the customer’s data, a company needs to check the customer. The main purpose of the background test is the identification of probable risks. While performing a background test, a customer is checked whether they had been involved in fraud or no.
3. Ongoing Monitoring
The main purpose of the ongoing monitoring process is to identify whether the data is actual or no. In addition, this procedure checks suspicious transactions. Depending on the results of the investigation, the exchange can bun the customer’s account and send the data to the regulatory structures.
Functions of KYC
A list of the most important functions of KYC includes:
Trust and confidence between customers
Stabilization of the crypto market
Compliance with AML crypto regulation
Let’s consider each of them in detail.
A high level of trust and confidence
KYC provides customers of exchanges with a high level of trust and confidence. P2P trading platforms allow their customers to trade with each other without involving third parties. It’s very important for users of these platforms to be confident in the legality of these transactions. They need to trust each other. If scammers, criminals, or frauds appear on the platform, users don’t want to trade at this platform anymore. Among the most important risks, that customers face on P2P platforms, we can emphasize dirty money tricks, social engineering, commas scams, and much more. So, the main function of KYC is to protect participants of the platform against suspicious users and “dirty money”
Stabilization of the Crypto Market
As it was announced, one of the main purposes of the AML policy is to stabilize the cryptocurrency market. The absence of solid trust among the users prevents the mass adoption of cryptocurrencies. Therefore, AML programs will ensure the demonstration of the cryptocurrency exchanges as legal entities protecting their customers against scams and “dirty money”. KYC programs help cryptocurrency exchanges to identify all the risks of transactions and provide honest customers with a high level of safety. A high level of trust among the customers will impact the stabilization of the cryptocurrency market overall in the future.
Compliance with AML crypto regulation
Non-compliance with AML crypto regulation is considered to be a serious risk to national security in the US because it facilitates money laundering that is a real threat to the economy overall. If crypto exchanges are non-compliant, a criminal fine reaches $20 million.
According to the AMLD5, non-compliant exchanges and wallets need to pay fines of 200,000 EUR per violation. If a crypto exchange meets all the requirements of the KYC and AML procedures, it’s protected against these lofty on-compliance fines.
In conclusion, in order to build a transparent cryptocurrency market built on trustworthiness and safety, new AML cryptocurrency regulations were announced on 20 July 2021. According to the new AML policy, crypto exchanges need to implement the KYC policy that will ensure reliable and safe cryptocurrency trading in the future. The main functions of KYC inсlude building trust and confidence between customers of the exchanges, stabilization of the crypto market overall, and compliance with AML crypto regulation.
