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Know Your Customer (KYC) is a procedure that uses financial institutions and crypto exchanges for verifying the identity of your customers. Crypto exchanges have to catch up with the traditional financial institutions for adopting KYC rules. They are usually slow reactors since the KYC policy is not at all suitable for blockchain platforms. This way, it becomes unusual for crypto exchanges to work against the concept of decentralization.
However, some regulators want them to adopt KYC to trade illegal transactions. It is because KYC can potentially identify every transaction in the age of the Internet and the Blockchain.
In this article, we will discuss the need for kyc crypto while trading.
Need For KYC Crypto In The Age Of Blockchain
Investors look into crypto-investment since opening an account on crypto is hassle-free. Sometimes, crypto does not ask for identity verification from the customers. It makes customers unaware of the concept of blockchain and cryptocurrency.
And although both blockchain and crypto provide anonymity, they have the potential benefits of allowing individuals and investors to trade without revealing their identities. However, it even causes the dilemma of carrying illicit money transfers through crypto exchanges.
Moreover, the crypto wallet requires a crypto wallet to make vast transactions, thereby leaving no paper trail or physical trade of a person. It can cause criminal activity on the platform.
It is why regulators are forcing financial institutions or crypto exchanges to institute KYC and comply with anti-money laundering regulations.
Reason For Having KYC For Trading Cryptocurrency
Crypto trading is fueled because of public demand and crypto exchanges offering the services. Crypto exchanges, located in tax havens and offshore locations are giving them a free hand in conducting their transactions free of regulatory restrictions.
Therefore, it is fundamental to have KYC for crypto trading since it will help identify criminals effortlessly.
Pressure From Financial Regulations
As discussed above, regulators are forcing crypto exchanges in implementing KYC procedures in trading. In this process, the United States is leading the list. It is allowing the crypto exchanges in the U.S. in monitoring fiat-to-crypto and crypto-to-crypto transactions.
On the other hand, in Europe, specific laws are obstructing the progress of this procedure. However, with regulators thoroughly pushing exchanges to adopt strict compliance alongside the U.S., the trend has also involved Asia and Africa with it.
It has enabled large crypto exchanges, headquartered in further locations in implementing the KYC rules too.
Increasing Data Exploitation
Financial institutions use data presented in the form of social media channels, news, web cookies, and more to gain more information about their clients. With the help of KYC, crypto exchanges can use information and data in the public domain to acquire more knowledge about their customers.
This data can also be used for video profiling and face recognition, thereby preventing large-scale illicit transactions from occurring.
Prevention From Terrorism Financing
In 2015, Deutsche Welle, a German media company, reported that a crypto wallet, that belongs to ISIS received $23 million within a month. To stop this terror funding, regulators are asking crypto platforms to adopt KYC procedures so that they can identify their customers efficiently. You can also expect your trading platform to implement KYC if you haven’t done it yet.
How Is KYC Preventing Money Laundering
KYC is part of enhanced rules and procedures that are designed with an objective to stop money laundering. It is the first significant step in the onboarding process that ensures to identify, monitor, and screen the activities of the clients.
KYC and other related procedures can help financial institutions in preventing money laundering by ensuring that the institution can prevent an individual from carrying out illicit financial transactions. If KYC is not implemented, anyone can easily transfer large amounts and carry dubious inside trades without a trace.
Moreover, a global intergovernmental organization like FATF is pressuring governments to implement strict rules in terms of money laundering. It has already put forward global standards for AML and CTF guidelines. Cryptocurrency exchanges believe that FATF should be adhered to because its main purpose is to block illegal means of transmission.
Hence, KYC is relatively significant for trading cryptocurrency.