Know Your Customer (KYC) procedure helps providers identify and verify their customers. This is done as part of the fight against money laundering/terrorism financing (AML/CFT), as well as to combat financial crimes and ensure customer integrity.
KYC actively combats criminal activity by collecting and verifying customer information. These types of audits increase confidence in the industry and help financial service providers manage their risks. On cryptocurrency exchanges, KYC practices have become commonplace. However, many criticize the fact that it neutralizes the main advantages of cryptocurrency - anonymity and decentralization.
Introduction
KYC is a general regulatory requirement that is mandatory for financial service providers. This practice is primarily aimed at combating the financing of crimes and money laundering obtained through illegal means. This is why KYC is becoming an important security measure, especially for cryptocurrencies. Financial institutions and service providers such as Binance are increasingly forced to implement such procedures to protect their clients and their assets.
What is KYC?
If you have opened an account on a cryptocurrency exchange, you will likely have to undergo KYC verification. As part of KYC, financial service providers are forced to ask the client for information confirming his identity. This could be an official ID card or a bank statement. Like AML provisions, KYC helps combat money laundering, terrorist financing, fraud and illegal transfers of funds.
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. Binance, for example, allows users to create accounts, but limits the ability to trade until KYC is completed.
During the KYC process, you may be required to provide the following documents:
Identity card (ID)
Driver's license
Passport
In addition to verifying the client's identity, it is also necessary to confirm his location and address. Identity documents will provide basic information (name, date of birth), but other documents will be required to establish your tax residence, for example. Most likely, you will need to go through several KYC stages. Financial service providers must regularly verify the identities of their clients.
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).
Why is the KYC procedure necessary in cryptocurrency?
Due to the anonymous nature of cryptocurrency, criminals use it to launder illegal funds and evade taxes. Better regulation of the cryptocurrency industry has a positive impact on its reputation and ensures that all taxes are paid. There are three main reasons why KYC practices are necessary in the cryptocurrency industry:
1. Transactions on the blockchain are irreversible. If you make a mistake in a transaction, no one can reverse it and give you your money back. This means that funds can be stolen or moved by criminals without any possibility of recovery.
2. Cryptocurrency ensures anonymity (users use pseudonyms). You do not need to provide personal information to open a cryptocurrency wallet.
3. Taxation and legislation regarding cryptocurrency in many countries is still not clearly defined.
Although KYC takes a lot of time when creating an account, the benefits of this practice cannot be overestimated. It may not be entirely obvious to the average customer, but KYC helps ensure the security of funds and fight crime.
Key benefits of KYC
Not all benefits of KYC are obvious. This practice helps not only to combat fraud, but also to improve the financial system as a whole:
1. Lenders can more easily assess their risks by knowing the client's identity and financial history. KYC promotes more responsible lending and risk management.
2. KYC aims to combat identity theft and other types of financial fraud.
3. KYC acts as a preventive measure against money laundering.
4. KYC increases customer confidence in financial service providers and helps monitor the security and accountability of these services. The reputation of services has a direct impact on the financial industry as a whole and can stimulate investment.
KYC and Decentralization
Cryptocurrencies have been focused on decentralization and freedom from intermediaries from the very beginning. As we have already said, any user can create a wallet and store cryptocurrency there without providing information about themselves. However, it is precisely for these reasons that cryptocurrency has become actively used for money laundering.
National governments and regulators generally require all exchanges to perform KYC checks for their clients. Making KYC mandatory for cryptocurrency wallets is quite difficult, so fiat-to-crypto exchange services are better suited for implementing KYC. Some investors use cryptocurrencies for speculation, while others truly value its capabilities and benefits.
Arguments against KYC
The KYC procedure has a number of obvious advantages, but still causes some controversy. Many people are opposed to KYC due to the traditionally anonymous nature of cryptocurrency. Typically, much of the criticism is based on issues with privacy and fees:
1. There are additional costs associated with performing KYC checks, which are often passed on to the client in the form of fees.
2. Some people do not have the necessary documents or a fixed address for KYC verification. All this makes it difficult for them to access certain financial services.
3. Irresponsible providers may have weak data security, and then hacks can lead to the theft of not only funds, but also your personal information.
4. There is an opinion that this practice contradicts the idea of decentralization of cryptocurrencies.
Summary
KYC processes are an industry standard for financial services and cryptocurrency exchanges. This practice is one of the most important measures to combat money laundering and other crimes. Nobody likes going through KYC checks, but they are extremely important because they help ensure security. As part of enhanced anti-money laundering measures, completing KYC verification allows you to trade cryptocurrency on exchanges like Binance with full confidence that your funds are secure.