Everything You Need to Know About KYC In Crypto (2024)

In order to identify and confirm a customer’s identification when a financial institution (FI) onboards them, KYC procedures are put in place. In this article, we will walk you through the need for KYC in Crypto and why it is important.

Through KYC procedures, FIs may determine a customer’s risk profile based on their susceptibility to financial crime. bearing this in mind, one may ask, What then is KYC

What is KYC?

“Know Your Customer” or “KYC” is the first step of AML (anti-money laundering), which refers to the process financial institutions (FIs) use to prevent money laundering, Banks and other FIs use KYC to identify and confirm the identity of their clients.

How does KYC function?

The KYC procedure includes a number of steps, some of which may be automated, to identify and confirm a customer’s identification. In order to perform identification checks, Financial institutions often gather information about their clients and may ask for documentation.

Financial institutions must have processes in place for collecting, managing, and storing consumer information. Thesehelp prevent financial crime by identifying and validating the identity of consumers.

What is crypto-KYC?

KYC compliance is the method through which cryptocurrency exchanges check the identification of their consumers. It resembles the method banks use to confirm the account holders.

To comply with AML rules, cryptocurrency exchanges also need to complete KYC. Cryptocurrency exchanges must verify their traders in order for their customers to know who they are doing business with.

Exchanges may aid in the prevention of illicit behavior like money laundering and the funding of terrorism by confirming the identity of their clients.

In order to comply with KYC laws, exchange clients may be asked to produce extra evidence to prove their identity. Once a customer’s identification has been confirmed by the exchange, they can only create an account and start trading.

Why does crypto need KYC?

Similar to how it is necessary for banks, KYC compliance is a requirement for all cryptocurrency exchanges. KYC is required for cryptocurrencies for two major reasons: They must, first and foremost, adhere to laws and regulations. In order to avoid being defrauded, they also need to be aware of who their clientele is.

Also, KYC is crucial in the cryptocurrency industry since it helps stop money laundering. In essence, it’s a technique to ensure that the money entering and leaving exchanges isn’t connected to illegal operations.

It may also be used to combat criminal activities outside the crypto sphere, including ransomware assaults that deny users access to computers or networks until they pay a ransom.

KYC could also be crucial for enhancing the economy’s perception of cryptocurrencies. Stronger compliance via more sophisticated identification methods might assist crypto in shedding its affiliation with illicit organizations. This may then promote more adoption and investment.

Can you trade crypto without a KYC?

Without a KYC, you may trade cryptocurrencies. The usage of significant exchanges like Coinbase or Binance, however, would not be permitted. Additionally, it will be more difficult for you to establish trading partners. Many cryptocurrency traders are reluctant to complete KYC.

They fear that the exchange will sell their information to unaffiliated parties, also despite the dangers, thesecrypto users who are fiercely protective of their privacy still look for non-KYC exchanges. Two strategies exist for avoiding KYC: Visit a different exchange if it’s not necessary. or engage in direct cryptocurrency trading.

However, trading on a non-KYC market has a number of dangers, including the fact that:

• Non-Know Your Client (KYC) exchanges are often less liquid than KYC exchanges since they are smaller and serve a smaller customer base.
• Since non-KYC exchanges have fewer AML policies than KYC exchanges, they are often less secure than KYC exchanges and more susceptible to fraud, hacking, and other illegal behavior.
• Exchanges that do not need KYC often charge greater fees than exchanges that do, since they must account for the risk of fraud and other illegal behavior.

So, even if trading cryptocurrency is feasible without KYC, it’s typically not advised. It is crucial to take additional precautions to safeguard one’s identity and personal information while utilizing an exchange that doesn’t need KYC.

Benefits of Crypto KYC

Some advantages of crypto KYC are listed below:

1. Lower risk of money laundering
2. Greater level of market stability
3. Higher transparency
4. Reduced instances of fraud
5. Less legal risk

Lower risk of money laundering

Exchanges may keep a closer eye on the transactions since they are aware of the identity of their consumers. This aids in stopping the transfer of money gained unlawfully, such as the proceeds from terrorism and drug trafficking.

Greater level of market stability

Due to pseudonymous transactions, which are often seen as risky, the crypto market may be very volatile and unpredictable. KYC processes that include improved identity verification aid in maintaining the market’s general stability and fostering investor trust.

Higher transparency

Regulators’ demands for the adoption of KYC contribute to exchanges’ continued transparency. This makes sure that everyone involved can see who is purchasing or selling cryptocurrency.

If customers believe the crypto exchange takes aggressive precautions to protect their accounts, they are more likely to stick with the service. Verifying users’ identities is ultimately in the best interests of customers and companies.

Reduced instances of fraud

Exchanges may avoid cases of fraud when they are aware of who is dealing with them. For instance, they may stop somebody from impersonating another person in order to get free cryptocurrency. Moreover, it makes it easier for exchangers to spot con artists.

Less legal risk

Businesses may lower their risk of regulatory penalties or legal challenges by undertaking KYC due diligence. Cryptocurrency exchanges may remain ahead of the curve as regulatory requirements evolve by implementing robust KYC processes.

Conclusion

The KYC requirements of cryptocurrency exchanges are more stringent than those of banks. They want extra information, such as the maiden name of your mother or the nation you were born in, as well as legitimate IDs.

They don’t have the same limitations as banks, which is why. To avoid being conned, cryptocurrency exchanges need to know who their clients are.

You’ll probably need to complete some kind of KYC if you trade cryptocurrencies. This can include submitting identifying papers online or providing thorough answers to identity-related inquiries.