What is KYC and why is it in blockchain?
KYC or Know Your Customer procedure helps to identify and authenticate companies and services of their customers in order to combat money laundering and terrorist financing (AML/CFT), as well as to prevent financial crimes and ensure the reliability of the customer base. We’ll tell you in more detail what it is, the pros and cons, and why it’s in the blockchain.
KYC actively combats criminal activity by collecting and verifying customer data, which helps increase trust in the industry and allows financial services companies to effectively manage risk. On cryptocurrency exchange platforms (or simply CEX exchanges), KYC has become common practice. However, this procedure is criticized because it undermines the main advantages of cryptocurrency - anonymity and decentralization.
What is KYC?
When opening an account on a cryptocurrency exchange, you will often (though not always) be required to undergo KYC verification. This process requires financial service providers to request information from the customer to verify their identity, such as official documents or bank statements. Just like AML requirements, KYC helps prevent money laundering, terrorist financing, fraud and illegal financial transactions.
KYC helps prevent crime rather than react to it. Most financial services require customer data during the registration process - even before they can make financial transactions. In some cases, accounts can be created without passing KYC, but then their functions will be limited.
KYC is aimed at preventing crime rather than reacting to it. Many services request client data at the registration stage, before transactions begin. In some cases, accounts can be created without KYC, but their functionality will be limited. For example, a ban on trading or restrictions on amounts.
KYC helps prevent crime rather than react to it. Most financial services require customer data during the registration process - even before they can make financial transactions. In some cases, accounts can be created without passing KYC, but then their functions will be limited.
KYC is aimed at preventing crime rather than reacting to it. Many services request client data at the registration stage, before transactions begin. In some cases, accounts can be created without KYC, but their functionality will be limited. For example, a ban on trading or restrictions on amounts.
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Who regulates KYC norms?
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 established standards for AML and KYC processes that still apply today. The EU and Asia-Pacific countries have developed their own rules, but they have many similarities with the US ones. The EU Anti-Money Laundering Directive (AMLD) and PSD2 rules are the main provisions applicable in EU countries. At the global level, this problem is being addressed by the Financial Action Task Force (FATF).
More than 200 jurisdictions around the world have subscribed to the FATF Recommendations through the global network of FSRBs and FATF Members.
KYC regulations vary from country to country, but there are international agreements regarding basic information requirements. In the US, legislation including the Bank Secrecy Act and the Patriot Act of 2001, as well as new bills, are being developed. The European Union and the countries of the Asia-Pacific region have developed their own standards, but they are in many ways similar to the American ones. For example, in EU countries, the main provisions in the field of combating money laundering are defined in the EU AMLD Directive and PSD2 rules, as well as MiCA - a new bill on the regulation of cryptocurrencies in the European Union. At the global level, these issues are being addressed by the Financial Action Task Force (FATF).
Why is this procedure needed in cryptocurrency?
Due to the anonymity of cryptocurrency, criminals often use it to launder illegal funds and evade taxes. Increased regulation in the cryptocurrency space may, in some cases, have a beneficial effect on its reputation and reliability. There are several main reasons why the KYC procedure can be useful for the blockchain sphere:
1
Irreversibility of transactions in the blockchain. If there is an error in a transaction, it cannot be reversed and the funds may be stolen without any possibility of recovery.
2
Anonymity ensured by cryptocurrency. Users can use pseudonyms and no personal information is required to create a cryptocurrency wallet.
3
Lack of generally accepted (internationally) legislation regarding cryptocurrency and the taxation system.
Even taking into account the complexity and time-consuming nature of the KYC procedure, it significantly helps ensure the safety of funds and in the fight against crime.
KYC and decentralization
From the very beginning, cryptocurrencies have focused on decentralization and getting rid of intermediaries. Any user can create an address and store cryptocurrency in it without revealing personal information. However, it is precisely because of this anonymous nature that cryptocurrency has become a popular tool among scammers.
Governments and regulators are looking to enforce and make KYC mandatory for all cryptocurrency exchanges. Some investors use cryptocurrency for speculation, while others value its features and benefits.
Governments and regulators are looking to enforce and make KYC mandatory for all cryptocurrency exchanges. Some investors use cryptocurrency for speculation, while others value its features and benefits.
Main advantages
Not all benefits of KYC are immediately noticeable. In addition to combating fraud, this procedure improves the financial system as a whole:
1
Thanks to KYC, lenders can more accurately assess their risks by having information about the client’s identity and financial history. This encourages more responsible lending and risk management.
2
KYC is aimed at combating identity theft and other types of financial fraud.
3
Is a preventive measure against money laundering.
4
Strengthens user confidence in financial services. The reputation of such services has a strong influence on the financial industry and can stimulate investment.
Main disadvantages
The KYC procedure is still controversial in the crypto world. Many of its opponents speak out due to the traditionally anonymous nature of cryptocurrency. The main arguments of critics relate to fees and privacy issues:
1
Conducting KYC checks involves additional costs, which are often passed on to the client in the form of commissions.
2
Some people lack necessary documentation or permanent residence, making it difficult for them to access certain financial services.
3
Some unscrupulous services may have weak data protection systems, which increases the risk of hacking and theft of not only funds, but also personal information of clients.
4
KYC contradicts the principles of cryptocurrency decentralization.
Opinion from the AML Crypto team
We believe that KYC is a standard procedure in the classical financial industry and, more recently, among cryptocurrency exchanges. This practice is one of the main tools in the fight against money laundering and other financial crimes. Although this procedure is not without significant disadvantages, which go against the philosophy of the crypto world.
One thing is certain - you can check a USDT wallet or check a BTC wallet, find out the probable owner of a crypto address without violating his right to anonymity in our solution Btrace - free AML check for every new user.
One thing is certain - you can check a USDT wallet or check a BTC wallet, find out the probable owner of a crypto address without violating his right to anonymity in our solution Btrace - free AML check for every new user.
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