Cryptocurrencies enable generally anonymous instant transactions, which is beneficial for many users, yet also gives criminals opportunities to evade conventional AML/CFT controls. Financial authorities address these risks by introducing regulatory measures, with Know Your Customer being one of them – find out what it means here.
What Is “Know Your Customer”?
Know Your Customer (KYC) is a foundation of Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations worldwide. It requires financial institutions to carry out identity and background checks on their customers before allowing them to use their services.
What You Need To Know About “Know Your Customer”
It would not be an exaggeration to say that the Know Your Customer definition refers to one of the biggest regulatory hurdles in the history of crypto exchanges. Yet, even the most reluctant crypto firms had to introduce KYC measures due to the growing pressure and penalization from authorities, such as the Financial Action Task Force (FATF).
In practice, Know Your Customer compliance means that crypto exchanges must adopt the following practices:
- Identity verification. Crypto platforms have to collect personal identifying information, such as full name, birth date, and address, from every customer. This data should then be verified against their official government-issued identification documents.
- Client screening. Exchange platforms must ensure that their users are not subject to international sanctions. They should also keep an eye on politically exposed persons (PEPs) who have a higher risk of being involved in money laundering.
- Transaction monitoring. Exchanges must monitor their customers’ transactions on an ongoing basis, paying special attention to signs of criminal activity like unusual transaction patterns, suspicious users, or high-risk locations.
- Monitoring adverse media. As part of the Know Your Customer measures, crypto platforms must continuously check media sources to detect potential customer involvement in criminal activity and prevent their transactions on time.
These Know Your Customer steps help crypto exchanges determine each client’s virtual currency money laundering risk and prevent financial crime.
Note that users who prefer to avoid KYC and stay completely anonymous can opt for decentralized exchanges and Bitcoin ATMs.
