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What is KYC? How Crypto Exchanges Combat Money Laundering

Know-your-customer (KYC) check is likely to be required if you’ve used a crypto exchange or purchased a non-fungible token (NFT). KYC checks are a vital component of the infrastructure of the global financial system and enable crypto businesses to comply with anti-money laundering (AML) legislation.

KYC requirements are essential for states and regulators to prevent using cryptocurrencies for crimes such as human trafficking, money laundering, and terrorist financing.

For many crypto proponents, the notion of centralised bodies overseeing bitcoins is antithetical to the space’s basic values.

One thing is certain: KYC and AML laws are a permanent component of the global financial system, and cryptocurrency exchanges are no exception.

Why do we need KYC and AML?

Know-your-customer (KYC) procedures identify and verify a customer’s identity. It is a multi-step process designed to prevent the creation and use of fraudulent accounts.

KYC seeks to comprehend the nature of a customer’s operations, verify the legitimacy of their source of funds, and analyse the associated money laundering risks.

KYC regulations were originally implemented in the US in the 1990s to combat money laundering, ranging from a name and email address to an address and photo identification. The rules protect consumers against identity theft and prevent money laundering and fraud.

Anti-money laundering (AML) rules date back to 1970, when the Bank Secrecy Act was passed. AML policies are intended to deter and prevent criminals from using the services of a bank or exchange to launder money or cryptocurrencies.

When adding the Tornado Cash currency mixing service to its sanctions list in August 2022, the US Treasury Department claimed its usage in money laundering and cybercrime.

The Bank Secrecy Act mandates that corporations maintain records and submit reports that law enforcement agencies can use to identify, detect, and prosecute money laundering by criminal groups, terrorists, and tax evaders.

KYC and Digital Currencies

Crypto exchanges are an integral aspect of the crypto ecosystem. Similar to a bank or stock market but not yet completely regulated, crypto exchanges use Identity Verification to comply with KYC regulations.

For instance, CoinSpot, the biggest crypto exchange in Australia, states that “CoinSpot will take reasonable steps to Identify you when you open an account to comply with Know your Customer (KYC) regulations. These measures are in place to protect both you and the broader community of Australia.”

Any consumer registering for an exchange must supply basic information to get started. This information normally consists of a name, email address, and birth date. To make full use of the exchange – for instance, to buy, sell, or trade more than a token amount of cryptocurrency -customers are required to give extra information, such as government-issued identification and a face scan.

However, Know-your-customer (KYC) policies are viewed by many as an invasion of privacy that creates honeypots for cybercriminals and identity thieves. Moreover, when a crypto firm files for bankruptcy protection and its paperwork become public court records, there is also a problem.

For instance, as the crypto-lending platform Celsius filed for Chapter 11 bankruptcy on July 11, 2022, its user and account data were provided to the bankruptcy court. When this information was made public, it became possible to link the identities of individuals to their on-chain activity and, by extension, to every transaction they had conducted on the blockchain. 

KYC in addition to Web3

Doxxing, the disclosure of a person’s identity and location, is a legitimate concern.

Some proposed an updated, Web3-friendly version of Know Your Customer (KYC) based on reputation and a restricted identity verification procedure.

Civic, a San Francisco-based company founded in 2015, has made online identity its Web3 focus, delivering enterprise and consumer solutions. The company has launched Civic Pass and for users to manage their online identities, NFTs, wallet addresses, and reputation from a single location.

Other initiatives set out to provide Web3 KYC services include Polygon with Polygon ID, Astra Protocol, and Parallel Markets; each promises to provide a streamlined client identification and compliance process.

KYC remains a contentious issue, particularly in an industry founded on privacy and permissionless transactions. KYC is here to stay as governments become increasingly interested in crypto and Web3 activities and the legacy banking system becomes further linked with the crypto realm. Developers can make it as painless as possible.

Read More: What is KYC? How Crypto Exchanges Combat Money Laundering

Disclaimer:The information provided on this website does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website’s content as such. does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.

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