In the current digital age, institutions are vulnerable to fraudulent activities. To prevent fraud and money laundering, many have introduced new methods.
One of them is the Know-Your-Customer (KYC) procedure, which serves as a protective measure to verify a customer's identity. This procedure is part of compliance and risk management programs, which help mitigate financial risks and ensure compliance with relevant anti-money laundering regulations.
What is KYC in crypto?
KYC aims to identify and verify users before they can access services or conduct transactions.
The KYC procedure can be divided into three phases:
- User Identification – The first stage of KYC always verifies identity. The minimum information required during this stage usually consists of the user's full name, residential address, and date of birth.
- User Due Diligence – The data mentioned above is verified by uploading a photo of the passport, identity card, or driving license to compare the government-issued documents with the information provided by the user. Then comes the address verification, determining if the user comes from the claimed region. This action aims to determine whether the user is from a high-risk country.
- Risk scoring and activity monitoring – The final stage of KYC is specifying the risk category of a particular user based on the provided information. After that, exchanges usually monitor their user’s activities. Abnormal spikes in the number of transactions or suspicious payments require supervision to determine whether they are fraudulent. Periodic account reviews are another critical part of KYC measures.
Why is KYC important in the cryptocurrency world?
KYC procedures are particularly crucial in the cryptocurrency market. Infrequently, cryptocurrency users create separate accounts under false identities, refuse to inquire about the source of their funding, and bypass personal sanctions. In such ways, cryptocurrencies may fund illegal financial activities.
Nonetheless, KYC has already been considered a standard procedure delivering enhanced transparency, which assembles the crypto industry as a more reliable partner for traditional businesses.
However, if you refuse to go through identity verification, you will either not be able to buy cryptocurrencies or have very low deposit limits. Usually, all you need is a valid ID to complete the KYC process and gain full access to cryptocurrency services.
Are there any options for those who wish to remain anonymous? DEX can be an alternative, as it does not require passing through a KYC procedure.
KYC procedures are essential to verify a user's identity, categorize their risk profile, and monitor ongoing activity to mitigate financial risks and comply with anti-money laundering (AML) regulations. The procedure is particularly crucial in the cryptocurrency market to prevent fraudulent activities.
While some prefer to remain anonymous, decentralized exchanges can be an alternative option as they (for now) do not require KYC procedures.