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KYC Best Practices17 May 2024

KYC in Crypto: Importance, Requirements & How it Works

Emmanuel Agwu

Cryptocurrencies have come a long way from being completely unregulated since it gained prominence over a decade ago. Today, crypto companies have several legal requirements they are mandated to satisfy if they wish to operate in several jurisdictions globally. Know Your Customer (KYC) in crypto is one of these requirements as it helps the crypto firm assess the customer’s risk profile and put adequate measures in place.

 

After its rise, cryptocurrencies became a tool for easy money laundering due to their decentralised nature and ability to leave no traces. KYC processes were mandated for crypto to cut down on money laundering and other financial crimes. 

What is KYC in crypto?

KYC in crypto companies refers to the series of processes the company undertakes to verify a customer’s identity during onboarding and perform equivalent due diligence to assess the risk they pose properly. KYC processes for crypto companies or Virtual asset service providers (VASPs) do not differ from traditional KYC conducted by financial institutions. 

 

The process generally involves the crypto firm obtaining customer information such as: 

  • Name
  • Date of birth
  • National ID (passport, driver’s license, National Identity Number or other government-approved IDs)
  • Address

 

However, KYC requirements for crypto firms may differ from one jurisdiction to another depending on the regulatory authorities. After collecting this information, the crypto company proceeds to verify the identity of the customer using an identity verification solution. This process ensures the VASP is fully aware of who the customer is and also spots criminals looking to leverage their platform for financial crimes.  

Why is KYC Important in Crypto?

KYC in the crypto industry is important for preventing criminal activities like money laundering and terrorist financing and safeguarding users from being exploited. Individuals using a crypto platform with KYC processes in place can be confident that they are transacting with other legitimate users and not bad actors. 

 

Without KYC, crypto exchanges will be exposed to potential fraud and scams since there is no process to screen out customers with criminal intent. This is one of the key reasons why several countries have passed regulations that mandate KYC due diligence as part of crypto companies' Anti-money laundering (AML) and Counter-Terrorism Financing measures.

What is Crypto Transaction Monitoring?

A crypto transaction monitoring solution empowers a crypto exchange to constantly monitor customer transactions to identify suspicious activities which might be an indication of financial crimes being committed. These activities must be reported to the appropriate regulatory authorities for further investigations. 

 

Ongoing monitoring of customer activities by crypto exchanges helps them remain alert and spot irregular patterns in the early stages before more damage is gone. Depending on the user risk profile and value of the transaction, biometric authentication requirements can also be put in place before confirmation to prevent unauthorised access.  

Do all Crypto Wallets Require KYC?

No, not all crypto wallets require KYC. There are two types of crypto wallets - custodial and non-custodial wallets. Custodial wallets are generally provided and managed by crypto exchanges that are required to implement KYC. However, non-custodial wallets do not require KYC. This kind of wallet allows the user to retain total control over their assets without providing personal information. 

What are the Benefits of KYC in Crypto?

Cryptocurrency exchanges benefit from KYC in crypto as much as customers do. Some of the benefits of KYC processes in the crypto industry include: 

1. Money Laundering and Financial Fraud Protection 

Between January 2021 and March 2022, $1.1 billion was reportedly lost due to crypto fraud via Social Media. Implementing KYC checks in crypto exchanges is one of the efficient ways to protect the platform from being used for money laundering and financial crimes. It also improves market reputation. 

2. Improved Trust

Verifying customer identities during onboarding improves the general trust in a business. This is because it signals that the business makes conscious efforts to protect itself from facilitating criminal activities. Customers are generally more likely to continue using platforms with processes like this in place. 

3. Regulatory Compliance

Having an effective KYC process in place will help crypto businesses satisfy compliance requirements. By preventing verifying customer identity, performing risk assessment and eliminating money laundering, crypto firms can avoid compliance penalties from regulators. 

4. Improved Market Stability

The crypto market is very volatile due to the anonymity of transactions. One huge fraud move can cause a sharp dip in prices. Performing KYC in crypto exchanges limits criminal activities, therefore, contributing to the overall stability and growth of the market. 

How can Crypto Exchange or VASPs Perform KYC?

The KYC process for crypto exchanges or VASPs generally includes: 

Step 1: Gather your customers’ personally identifiable information (PII), including their full name, date of birth, address, and other relevant details.

Step 2: Validate this information by comparing it with official government-issued identification, such as a passport or state-issued driver’s license, as well as proof of residence like a utility bill.

Step 3: Conduct thorough AML checks against recognised databases containing information on Politically Exposed Persons (PEP), sanctioned and watchlist.

 

These steps are essential for financial institutions to assess the money laundering and financial crime risks associated with onboarding a client. After verification, customers can securely transact with other users on the cryptocurrency exchange.

Achieving KYC Compliance for Crypto Companies with Smile ID

Ultimately, KYC compliance is compulsory for crypto companies looking to operate in several jurisdictions globally. Smile ID compliance solution empowers crypto firms to verify and onboard customers seamlessly. Crypto companies can verify customer identity, run AML checks and adopt adequate biometric authentication protection based on preset triggers. 

 

Get started today; book a free demo to see how our solution can automate your crypto KYC process and save you time and resources without compromising compliance. 

Ready to get started?

We are equipped to help you level up your KYC/AML compliance stack. Our team is ready to understand your needs, answer questions, and set up your account.