​What Is KYC or Identity Verification, and How Is It Increasingly Important for Crypto?

Like other financial institutions, major cryptocurrency exchanges across the globe make KYC, or identity verification mandatory in order for users to receive uninterrupted access to their services. Why is KYC verification necessary, how does it benefit cryptocurrency traders and how does it differ from anti-money laundering regulations? Does KYC verification defeat the purpose of decentralization in public cryptocurrencies? We’ll address these questions and more in this article. 

What is KYC, or Identity Verification?

KYC is an acronym for “know your customer”, or “know your client”. It refers to the verification of a customer's identity, typically by a financial institution. Identity verification requires information that can be used to–of course–verify your identity, like a valid ID card, utility bills containing your home address, a passport, etc. ID document requirements vary from institution to insitution, and even region to region.

Customers are typically required to submit identity verification documents during account opening and at times, when there has been a change in the user's personal information. For example, if you officially change your name a few months after creating your account, you will be required to update your personal information. 

If you do not complete the KYC process, you may not be able to access all the features on a cryptocurrency exchange. For example, Apexmynt allows customers to create accounts, use basic functions and perform limited transactions without submitting KYC information. In order to gain full access and increase higher deposits and withdrawal limits, customers will need to complete the KYC verification process. 

What Is the General KYC Process?

Depending on the nature of a business, KYC processes may vary but generally, they fulfill similar objectives. KYC comprises the basic features such as data collection and verification. It also involves customer due diligence and ongoing monitoring. 

KYC verification is usually grouped into three parts and processes:

1. Customer Identification Program (CIP)

This is the first and most straightforward KYC process. It simply involves the collection and verification of customer data. For banks, this stage usually comes during enrollment. For cryptocurrency exchanges and other less rigid financial institutions, it comes after registration. 

2. Customer Due Diligence (DD)

After verifying identity, a company may decide to dig deeper by performing a background check on the customer. The goal of the background test is to perform a risk assessment. If the customer has been flagged for financial fraud in the past or is under investigation, it will be flagged during the background check. 

3. Ongoing Monitoring 

Ongoing monitoring ensures that KYC information is up to date and allows the system to continually scrutinize transactions that may appear suspicious. For a cryptocurrency exchange, multiple large transactions to a country that is on the US terrorist watch list might be flagged out. Depending on the investigation, the exchange might suspend the customer’s account and report the case to the necessary regulatory and law enforcement bodies. 

Why is KYC Mandatory for Most Crypto Exchanges? 

Know Your Customer (KYC) regulations are mandatory for major cryptocurrency exchanges because it ensures they comply with regulatory rules and laws.

The goal of KYC is to curb illicit activities and to highlight suspicious behaviour as early as possible. Cryptocurrency exchanges utilize these data to track transaction patterns to ensure safe and compliant transactions. 

Without KYC verification, a cryptocurrency exchange may be held liable when a user gets away with committing a crime because they failed to do due diligence. Henceforth, major exchanges prefer to remain anti-money laundering (AML) compliant. 

However, KYC and AML, while sometimes related, do not refer to the same thing. 

What is the Difference Between KYC & AML?

The know your customer requirements are just one part of a broader umbrella term commonly called anti-money laundering (AML). AML includes a