The adoption and use of cryptocurrency and blockchain technology are increasing worldwide. As the demand for alternate financial exchange solutions accelerates, regulators demand more transaction transparency to help identify and monitor money laundering.
Enter KYC, an acronym for ‘Know Your Customer’ or ‘Know Your Client.’ While not a new concept in global banking and fintech industries, the KYC process is fast becoming a compulsory gold standard to maintain transparency and compliance in the crypto market. So why is KYC so important, and why is it required?
The short answer is to prevent anonymous – and potentially problematic – transactions. When it comes to security, compliance, and accuracy for your clients and systems, eliminating anonymity merely scratches the surface of KYC’s impact on the industry.
What is ‘Know Your Customer’?
Know Your Customer (KYC) isn’t just a concept but a systematic process that incorporates measures and safeguards to collect customer data. Financial institutions and companies are obliged by regulators to verify the identities of people wishing to use their crypto exchange platforms or products. A rigorous and robust KYC system prevents criminals from using legitimate platforms to engage in unlawful financial activity and hide from regulators.
Companies that engage in cryptocurrency transactions, such as exchange platforms, use KYC processes to identify their customers and maintain compliance with regulatory standards established by governments.
Governments worldwide require KYC compliance which is one aspect to deter Anti-Money Laundering Practices (AML), terrorism financing, tax evasion, and other corrupt practices. The increased transparency offered by implementing KYC processes makes it easier to track and identify criminal activity before it causes significant issues.
Every government has unique regulatory standards, and the rules differ based on jurisdiction. For example, while the European Union has standardised regulations, each country also has different rules to comply with, including the fundamental EU standard. Nowadays, many companies, such as Data Zoo, offer automated identity and fraud solutions to help businesses establish confidence that a customer’s identity is real and that they are the genuine owner of the information provided. While some systems have the minimum safeguards for customer data, others are more secure, reliable and privacy-enhancing, ensuring data protection, privacy and accountability.
How KYC Ties to Crypto Exchange
To appreciate the importance of KYC, one must understand how it enhances cryptocurrency’s reputation as a viable and trusted financial exchange medium to attract more users.
Cryptocurrency gained popularity due to the ease of transactional exchange between blockchain users in a decentralised environment. With little or no fees to worry about, people (or entities) in different countries could engage in instant and secure cross-border transactions that took mere seconds to complete.
Instead of using centralised entities for transfers that came with exorbitant fees and took several days to complete, cryptocurrency offered a fast, anonymous, and reliable process without an intermediary.
The problem is that not all transactions had good intentions. Anonymity and speed attract not just the everyday user but also entities that engage in illegal activities. Since the crypto market’s strength relies on factors like demand, supply, production costs, platform availability, and regulations, it could attract more investors with proper safeguards.
How Does the KYC Process Work?
Every KYC process differs. While some only require a few steps to verify users, others are intricate and allow for a more thorough risk-based process.
At its core, the KYC process keeps companies and economies safe. It does so by implementing controls that prevent clients from engaging with known entities that promote terrorism, financial fraud, money laundering, and other forms of illegal activity.
Throughout the KYC process, users must provide legitimate proof that they are who they say they are. These include reliable and independent sources, such as:
A government-issued ID
An active and valid passport
A social security number
A national insurance number
Utility Bills
Bank statements
Proof of residence/address
Although many may attempt to bypass these safeguards, Artificial Intelligence, market experience, and technological advances of KYC providers limit their ability to fool the system.
How KYC Benefits the Market – and Your Peace of Mind
In 2020 alone, an alleged 270 crypto addresses engaged in money-laundering practices resulting in $1.3 billion in “dirty” money bypassing regulators. Since many large global investors want to join the market, regulators are searching for solutions to limit illegal activities.
KYC processes are essential to markets, governments, and companies due to Customer Due Diligence (CDD) practices. They allow for risk mitigation by gathering data from multiple sources to form a complete picture. KYC processes not only identify customers but also:
Shed light on the activities a customer is engaging in
Indicate what markets the user is most active in
Uncover whether the client has a business
Provide a risk profile per user based on the acquired information, reducing liability
KYC solutions, such as those offered by Data Zoo, help businesses verify the identity of employees and clients using multiple means before they are onboarded or access designated services. The more robust the process is, the less businesses need to worry about unscrupulous activities by users that can significantly harm operations in the short and long term.
Moreover, companies that adopt robust KYC practices are less likely to face non-compliance issues, allowing them to operate seamlessly and within the boundaries of the law.
KYC processes help the crypto market to secure transactions and protect investor money which ultimately encourages more investment, strengthening the market over time. Since cryptocurrency relies on supply and demand, it is important for new investors and users to feel safe knowing that multiple safeguards exist to protect them.
Is KYC Necessary in Today’s World?
Many believe that KYC goes against the principle of crypto since it promotes centralization and eliminates anonymity by requiring the provision of identifiable information.
Safety and security are at the forefront of government and company interests worldwide. When people or entities with criminal intent transfer crypto, a lack of source information and how the recipient plans to use the funds harms economies, investors, the average crypto user and threatens national security.
Having a robust KYC process in place also prevents companies from inadvertently allowing the transfer of funds to terrorist organizations and money launderers.
Those who have nothing to hide and bring value to the development and use of blockchain technology need not worry about KYC processes since they keep transactions legitimate, secure, and transparent.
Explore Reliable KYC Processes with Data Zoo
One cannot overstate the importance of proper customer verification in the cryptocurrency market, especially for today’s businesses. KYC systems are changing the way companies and regulators work together to ebb the flow of dirty money and fortify the strength of the crypto market. But not every KYC solution gives you the results and insights you need to make risk-averse decisions for your platform.
That’s where Data Zoo comes in. Our products and services include identity proofing, identity affirmation, KYC remediation, fraud detection and crypto-address screening with unmatched access to reliable and independent data sources.
As there isn’t a one-size-fits-all solution for every company, our team helps you customise and configure what you need to enhance operational efficacy and risk management. Our goal is to set new benchmarks and become the standard for KYC solutions.
Are you ready to learn more about how our KYC solutions benefit your company and help achieve compliance?
Book a demo today to learn more about how Data Zoo can help you build trust throughout the customer journey.