The importance of cryptocurrencies in international markets has increased in recent years and has influenced the functioning of many economic areas. However, as their popularity has increased, the risk of using cryptocurrencies for illegal activities has unfortunately also increased. This is mainly influenced by the considerable anonymity of the transaction players and the lack of clear regulations. For this reason, KYC in cryptocurrencies has become an essential part of the functioning of the market. This is because it allows the identification of individual participants in transactions, as well as the verification of their reliability and the assurance of a high level of regulatory compliance. But what does KYC mean in crypto? Is KYC in Bitcoin also applicable? What benefits does KYC in crypto provide? This is what you will find out from reading the article further.
What is KYC?
KYC stands for Know Your Customer – or, to explain it in the simplest possible way, it is the requirement to carry out identity checks and customer due diligence. It is a procedure to be carried out by financial institutions and other legal entities to identify the identity of customers and to obtain the relevant information required to initiate cooperation. In practice, the KYC procedure consists of verifying the client’s basic personal data, the business activity carried out, and assessing the client’s reliability.
What does KYC mean in crypto?
KYC in crypto refers to verifying customers’ identities, as in other financial sectors that have so far operated in international markets. Cryptocurrency platforms and exchanges carry out the KYC procedure before granting access to cryptocurrency trading or other financial services related to this type of virtual money. KYC in cryptocurrency aims to prevent money laundering, terrorist financing, and other illegal activities.
It is also worth knowing that cryptocurrency exchanges often use KYC to comply with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations. Introducing KYC positively enhances the transparency and security of cryptocurrency transactions and protects users and platforms from illegal activities.
Is KYC in cryptocurrency necessary?
Definitely yes. In the 15 months leading up to Q1 2022, fraudsters worldwide stole more than $1 billion in cryptocurrencies, which they took out of the accounts of 46,000 people, according to data released by the Federal Trade Commission.
These unpleasant events have spurred essential changes aimed at removing cybercriminals from the industry. For example, in 2021, one of the most prominent crypto exchanges on the market, Binance, increased its requirements for customer verification due to increasing pressure from global financial regulators. At the same time, it is important to remember that regardless of KYC in cryptocurrency exchanges, funds held in cryptocurrencies still retain high anonymity due to using unverified wallets.
Challenges of the cryptocurrency market and KYC
Cryptocurrencies are decentralised in nature and provide a high level of anonymity. However, these characteristics, while seemingly positive, also present challenges in preventing money laundering and using cryptocurrencies for illegal transactions. In this context, KYC becomes crucial in ensuring the smooth functioning of the market and the protection of the interests of those investing funds in cryptocurrencies.
Although the need for uniform regulations in cryptocurrency still faces resistance from some users, international institutions have already taken steps to protect customers better. For example, accurate verification of a client’s identity during onboarding to a crypto platform provides the capability to detect any irregularities in the movement of funds more efficiently. This, in turn, facilitates a 24/7 risk assessment of the crypto market and aids in the future detection of similar crimes.
KYC identity verification in the crypto market – summary
So, now you know what does KYC mean in crypto. While this procedure may raise questions about maintaining anonymity in the crypto market, the benefits of KYC are significant. It is worth noting that KYC tends to be proactive rather than reactive. In fact, most financial service providers collect customer data while deploying to a platform before they can make financial transactions.