A KYC is a process cryptocurrency exchanges use to verify their customers’ personal details, understand their activities better, and verify their legitimacy.
Assesses the likelihood that their customers may be involved in money laundering.
Knowing your customer (KYC) is the first part of anti-money laundering compliance. The KYC process is followed by a financial institution (FI) when it onboards a new customer. It identifies and verifies the identity of the customer. Through these processes, FIs can assess a customer’s propensity for financial crime and evaluate their risk profile.
Throughout the last decade, crypto companies, or virtual asset service providers (VASPs), have risen to prominence in the financial system, with terms such as Bitcoin, Ethereum, cryptocurrency exchanges, and Bitcoin wallet becoming household terms.
As businesses use cryptocurrency for new purposes, money launderers, terrorists, and other criminals also leverage it. Governments have responded by subjecting crypto service providers to Anti-Money Laundering (AML) regulations. As a result, crypto businesses are now required to implement Know Your Customer (KYC) procedures to adhere to such rules.
What Is The Cost Of KYC For Bitcoin?
A KYC, or Know Your Customer, program is sometimes mandatory, undoubtedly beneficial, and sometimes extremely expensive. There is a great deal of difficulty in calculating the KYC cost. A compliance tool’s price must consider manual hours, staff hires, and staff salaries.
When your checks are too heavy-handed, your customers abandon your platform. The situation is usually made worse by the fact that they will usually look for competitors with less stringent processes.
Many examples exist across many industries and scenarios, including lengthy onboarding processes, ineffective video verification software, intrusive personal questions, and asking for too much data for a simple transaction, etc.
Businesses must balance security with friction for their systems to run smoothly.
What Are The Reasons For KYC In Crypto Companies?
In most countries, KYC is considered a legal requirement for crypto transactions. To prevent fraudulent activity, most crypto service providers require customers to pass KYC checks before buying cryptocurrencies or withdrawing funds. The reality is, however, that some crypto services still offer clients the opportunity to trade without undergoing KYC. These are usually unregulated, decentralized exchanges or exchanges from countries with weak anti-money laundering regulations. Depending on the exchange, KYC may be required only when withdrawal limits are exceeded.
There are several risks associated with using a crypto service that does not require KYC:
Regulators must pay close attention
Failure to comply with AML regulations
A lack of trust from partners
Weakened protection leaves criminals more vulnerable
By implementing KYC in crypto companies, the following can be achieved:
Identifying and combating fraud and identity theft
Keeping customers’ trust
Preventing the laundering of money and financing of terrorism
Establishing trust with partners
Transparency is provided
Does KYC Compliance Apply To Crypto Wallets?
A crypto wallet can either be custodial (managed by the user) or non-custodial (hosted by the user). Only custodial wallets must comply with KYC practices since they hold a customer’s private keys. VAs are now regulated as financial institutions and must have a robust FYC framework, according to the Financial Action Task Force (FATF). VASPs are defined as natural or legal persons who exchange, hold, keep, sell, convert, or otherwise transfer VAs on behalf of others. The KYC requirement does not apply to self-hosted wallets or non-custodial wallets. A KYC compliance program is required for custody wallet services associated with a VASP.
There will be continued implementation of new regulations for crypto assets as well as tightening of existing ones. The trust of major players can be secured by ensuring that crypto businesses comply with AML regulations. It might take some time for crypto companies to become fully compliant, but they will benefit in the long run.