What is KYC (Know Your Customer)?

KYC actively combats criminal activity by collecting and analyzing customer information. These measures build confidence in the industry and help financial service providers manage their risks. On cryptocurrency exchanges, KYC is becoming standard practice. However, some have criticized this practice, arguing that it undermines key cryptocurrency characteristics such as anonymity and decentralization.

KYC is a necessary legal requirement that financial service providers must comply with. The main purpose of this practice is to combat the financing of crimes and money laundering obtained through illegal means. This is why KYC is becoming a key security mechanism, especially in the context of cryptocurrencies. Financial institutions and service providers, such as cryptocurrency exchanges, are increasingly forced to implement such procedures to protect their clients and their assets.

KYC plays a key role in preventing crime, not just responding to it. Most financial services require customer information during registration, before they are even allowed to conduct financial transactions. Although in some cases accounts can be created without going through KYC, their functionality will be limited.

During the KYC process the following documents may be required:

The KYC process not only verifies the customer's identity, but also requires confirmation of their location and address. Identity documents contain basic information such as name and date of birth. However, other documents may be required to establish tax residency. Most often, completing KYC involves several stages.

KYC regulations vary by country, but there is international agreement on the basic information required. In the US, the Bank Secrecy Act and the Patriot Act of 2001 set standards for AML and KYC processes that are still in effect. The EU and Asia-Pacific countries have developed their own rules, although they have many similarities with the US ones. The EU Anti-Money Laundering Directive (AMLD) and PSD2 regulations are the main regulations in force in EU countries. At the global level, the issue of combating money laundering is addressed by the Financial Action Task Force (FATF).

The anonymous nature of cryptocurrency often leads to its abuse by criminals to launder illegal funds and evade taxes. Stricter regulation of the cryptocurrency industry makes a positive contribution to its reputation and ensures that all tax obligations are met. There are three main reasons why KYC practices may be necessary in the cryptocurrency industry:

Although the KYC procedure takes some time to create an account, the benefits of this practice are quite great. It may not be immediately obvious to the average customer, but KYC helps ensure the security of funds and fight crime.

Although not all of the benefits of KYC are immediately obvious, the practice does contribute not only to combating fraud, but also to improving the financial system as a whole:

Cryptocurrencies have strived for decentralization and disintermediation from the very beginning. As already mentioned, any user can create a wallet and store cryptocurrency in it without providing information about themselves. However, it is precisely because of this anonymity that cryptocurrency has become actively used for money laundering.

National governments and regulators generally require all cryptocurrency exchanges to implement KYC checks for their customers. However, implementing a mandatory KYC procedure for cryptocurrency wallets is quite difficult and not always necessary, so fiat-to-cryptocurrency exchange services are more suitable for this. Some investors use cryptocurrencies for speculation, while others appreciate its real possibilities and benefits.

The KYC procedure, despite a number of advantages, still causes some controversy. Many users express negative views towards KYC due to the traditionally anonymous nature of cryptocurrency. The main arguments of critics usually relate to issues of confidentiality and fees: