Know Your Customer (KYC) also known as knowing your client is the act of collecting your customer’s information for familiarity purposes. KYC regulations are mandatory for major cryptocurrency exchanges because it ensures they comply with regulatory rules and laws. But that’s not all, slide down to get more information on KYC.
What Is Know Your Customer(KYC)?
Know Your Customer (KYC) compliance is the process of gathering specific information from customers in order to verify their identities and meet any regulatory requirements that may apply.
The Know Your Client or Know Your Customer is a standard in the investment industry that ensures investment advisors know detailed information about their clients’ risk tolerance, investment knowledge, and financial position. KYC protects both clients and investment advisors.
KYC, allows businesses to verify that their customers are who they claim to be, determine whether a customer is suitable for their services, and avoid any malicious or criminal activity associated with the use of their products or services.
KYC regulations are intended to reduce identity theft and fraud by requiring businesses to collect and verify key data about customers in order to truly understand who they are.
When customers open new accounts, apply for loans, make investments, or take other important actions, financial institutions (FIs) frequently require them to go through KYC procedures.
These measures frequently include requests for identity data — such as driver’s licenses, Social Security numbers, and other financial statements — verification, and data storage to ensure compliance in the event of an audit.
While cryptocurrency exchanges are now subject to the same rules as their traditional financial counterparts, some have pushed back against regulations, arguing that collecting this data undermines the anonymous nature of crypto.
Other exchanges require clients to upload identity data when creating accounts, but they immediately grant trading access without verifying this data — privileges are only revoked if the KYC checks reveal anything concerning. Others have chosen to avoid US KYC regulations by suspending access for American users.
Despite attempts to short-circuit or avoid KYC cryptocurrency regulations, the growing cryptocurrency market and more mainstream appeal virtually guarantee that KYC rules will not only be expanded for exchanges but will also spur increased regulatory enforcement.
Importance of Knowing Your Customer
Despite any operational changes and challenges associated with KYC regulations, cryptocurrency exchanges stand to benefit significantly from regulatory compliance, including the following:
- Increased transparency and trust among customers: The verification of user identities increases transparency and customer trust. Users are more likely to continue using a cryptocurrency exchange if they believe it is taking proactive and preventive measures to protect their accounts.
- Money laundering and other scams are less likely to occur: According to a 2022 report from the leading blockchain analytics company Chainalysis, criminals laundered $8.6 billion in cryptocurrency in 2021, a 30% increase over the previous year. Identity verification can significantly reduce fraudulent activity while also improving market reputation.
- Reduced legal risk: As legal expectations transit, implementing robust KYC policies allows businesses to stay ahead of the curve — instead of chasing after new regulations, they can focus on increasing conversion rates, streamlining transactions, and ensuring compliant transactions as international guidelines shift.
By demonstrating KYC due diligence, businesses can reduce their risk of legal challenges or regulatory penalties.
- Increased market stability: The cryptocurrency market is notoriously volatile due to anonymous transactions that may be suspicious. KYC programs that feature increased identity verification contribute to the market’s overall stability and value growth.
What Is the General KYC Process?
Depending on the nature of a business, KYC processes may vary but generally, they fulfill similar objectives. KYC comprises basic features such as data collection and verification. It also involves customer due diligence and ongoing monitoring.
KYC verification is usually grouped into three parts and processes:
1. Customer Identification Program (CIP)
This is the first and most straightforward KYC process. It simply involves the collection and verification of customer data. For banks, this stage usually comes during enrollment. For cryptocurrency exchanges and other less rigid financial institutions, it comes after registration.
2. Customer Due Diligence (DD)
After verifying identity, a company may decide to dig deeper by performing a background check on the customer. The goal of the background test is to perform a risk assessment. If the customer has been flagged for financial fraud in the past or is under investigation, it will be flagged during the background check.
3. Ongoing Monitoring
Ongoing monitoring ensures that KYC information is up to date and allows the system to continually scrutinize transactions that may appear suspicious.
For a cryptocurrency exchange, multiple large transactions to a country that is on the US terrorist watch list might be flagged out. Depending on the investigation, the exchange might suspend the customer’s account and report the case to the necessary regulatory and law enforcement bodies.
What Is KYC Verification?
The Know Your Client or Know Your Customer (KYC) verification is a set of standards and requirements used in the investment and financial services industries to ensure they have sufficient information about their clients, their risk profiles, and their financial position.
What Is KYC in the Banking Sector?
KYC in the banking sector involves bankers and advisors identifying their customers, beneficial owners of businesses, and the nature and purpose of customer relationships, as well as reviewing customer accounts for suspicious and illegal activity. Banks must also maintain and ensure the accuracy of customer accounts.
What Are KYC Documents?
Requirements differ in different jurisdictions. However, account owners generally must provide a government-issued ID as proof of identity. Some institutions require two forms of ID, such as a driver’s license, birth certificate, social security card, or passport.
In addition to confirming identity, the address must be confirmed. This can be done with proof of ID or with an accompanying document confirming the address of the record.
Can you buy crypto without KYC?
You can buy crypto without KYC, but it’s more complicated and potentially riskier than using an exchange that follows KYC regulations. The most common ways to buy crypto without verifying your identity are decentralized exchanges and Bitcoin ATMs.
Know Your Customer (KYC) is a set of standards and requirements used by investment and financial services firms to verify their customers’ identities and any associated risks with the customer relationship.
One major advantage of completing KYC on Binance is that users receive a tier upgrade with lower fees and higher withdrawal limits. While unverified users can only withdraw a maximum of 0.06 BTC per day, verified users can withdraw up to 100 BTC per day.