Know Your Customer, or KYC is a mechanism for checking and verifying the identity of customers. It is conducted as part of the process of preventing fraudulent activities and financial misconduct.
It dynamically contends illegal action by obtaining and confirming customer data. The device advances trust in the system and assist financial institutions in controlling risks.
KYC is now a usual method in the digital asset market, particularly in the exchange market, even though many see it as not in line with Cryptosphere’s principal credo of financial privacy.
Regulators require institutional that provides financial services to ensure all the people they serve go through a verification system to ascertain their true identity. The ultimate purpose is to contend the bankrolling and laundering of money for prohibited pursuits.
Whatever it is, we will always have bad actors who want to use the system to commit malicious activities. Therefore, KYC stands as a safeguard mechanism to get rid of such elements.
In Cryptocurrency, there is a wrongful notion that criminals utilize it for their activities and the authorities believe making sure there is a framework to check the identities of all users is the best way to go. It has become a core measure to block crimes like money laundering and so-called terrorism financing.
KYC normally is a vigorous procedure somewhat than responsive. In many instances, service providers collect clients’ information during the onboarding period before they can transact. In other situations, accounts can be set up, but without the KYC, capacity is restricted.
The KYC process always asks for some identity documents from your country of origin or residence. These are some of the documents most platforms ask:
- Government ID
- Driving license
- National Identity Card
Aside from the attestation of one’s identity, it’s additionally necessary to validate the address. While your identity papers render primary data like name, date of birth, nationality, more is required to authenticate your residence, for instance.
An individual can perform more than one level of KYC processing. For example, traditional financial institutions frequently demand to re-confirm the identification of clientele at regular interims besides.
Regulating KYC Assent?
Regulating KYC varies by jurisdiction, although there is universal collaboration on the primary data required. In the US, the 2021 Patriotic and Bank Secrecy Act informed most of the KYC methods prevailing at the moment.
Concerning EU and Asia-Pacific, they have promulgated statutes. This regulation is regarding the PSD2 and EU Anti-Money Laundering Directive (AMLD) implement the central structure for nations in the European Union.
Moreover, The Financial Action Task Force (FATF) regulates multi-national collaboration on administrative provisions at a global stage. In a nutshell, that is how most countries deal with Know Your Customer via legislation.
Decentralization And KYC
Crypto stands on a pedestal of P2P transactions without third parties or whatsoever. Anyone with access to the internet, PC, or smartphone can set up a Crypto wallet to store their assets without the requirement to present information about themselves.
But, for these specific purposes, arguably and yet to be proven with empirical evidence, virtual currencies have become a conventional method for money laundering. Therefore, authorities mostly command Crypto exchanges to perform KYC controls on their customers.
While compulsory KYC is quite challenging for Crypto wallets, swapping fiat into crypto services is more fitting. Some investors are contemplatively engrossed in cryptocurrencies, and others more actively comprehend their essential advantages and efficiency.
KYC has its apparent advantages, yet it is a suspect in the Crypto space. Reasoning against KYC is more related to the nature of Cryptocurrency, which is the absence of middlemen in all transactions and the privacy layer.
KYC, on the contrary, renders transaction costs higher since conducting checks is expensive, and customers and users of platforms have to settle that. Moreover, the process denies some people the opportunity to participate in the Crypto market if they have no identity documents.
In such a situation, it is stressful for such people to access financial services on the Blockchain. In many occurrences, platforms inactions have led to security breaches exposing the data and privacy of their users.
In its entirety, KYC is an affront to the Crypto philosophy that goes against the decentralization principle. It is a total divergence that was the reason why Crypto assets came into existence.