Know Your Customer (KYC), or sometimes referred to as Know Your Client, is a process by which a business or agency verifies the identity of its clients. The process is mandatory for banks, lenders, insurance providers, and other financial and monetary companies of all sizes. KYC is a data-driven process that allows companies to ensure that their customers are who they claim to be, to ascertain the suitability of a customer for their services, and to avoid any malicious or criminal activity associated with using their services
Do All Financial Institutions Need KYC?
In the current compliance environment, government-regulated institutions have to build their own KYC program and craft internal policies based on their own interpretation of the applicable regulations and understanding of the risks that they may face. This results in highly variable KYC requirements, including variations in the different types of information required for verification, such as passports, utility bills, driver’s licenses, or bank statements, among others.
Cryptocurrency, as an upcoming financial exchange medium, must follow KYC processes in order to appeal for mass adoption. Therefore, it is necessary to discuss why KYC is important, how it is implemented, its merits, the laws surrounding it, and its future.
Why is KYC Important?
KYC is important for compliance to anti-money laundering (AML) and anti-bribery standards, in the form of the legislature at both global and national levels. Since 1989, many countries around the world started committing to follow the recommendations of the Financial Action Task Force; however, KYC does not have a single or uniform definition, and different regions in the world have different versions of their AML or KYC legislation.
Overall, the objective of KYC is to prevent financial/non-financial businesses from being used—intentionally or unintentionally—by criminal organizations for money laundering, terrorism financing, and other illegal purposes. By implementing KYC processes, businesses can gain a proper understanding of their customers and their financial dealings and are able to reject applicants with questionable or risky backgrounds. Thereby, businesses can easily monitor client activities and avoid risk.
Potential KYC Verification Requirements for Exchanges
You’ll find that KYC requirements vary drastically between different exchanges. Some require nearly nothing while others require government-issued ID and could take several days to verify your account.
Cryptocurrency is a world-wide industry and there are very different laws and requirements in different countries. Sometimes exchanges in the same country will have different KYC requirements based on their interpretation of the law.
That said here are some of the common requirements that you might run into on different exchanges:
- Full name
- Date of birth
- Phone number and/or email address
- Physical address and/or country of residence
- Photo/scan of government-issued ID
- Copy of utility bill
- Photo of yourself with your ID
Is KYC Required by Law?
Know Your Customer compliance is required by law for banks, lenders, insurance providers, and other financial and monetary institutions of all sizes. Cryptocurrency exchanges currently fall within a bit of a gray area when it comes to KYC compliance. As seen in the above section, most crypto-to-crypto exchanges do not require any KYC, with the exception of fiat-to-crypto exchanges, which always require customers to undergo the KYC process as soon as they want to buy or sell rather than trade. Essentially, at this current juncture, the only crypto exchanges required by law to enforce KYC are the ones who deal with legal tender, in the form of exchanges or otherwise. This is because crypto exchanges have to deal with institutions that perform KYC verification on the crypto exchange’s platform itself.
Is KYC Safe for Customers?
Know Your Customer is a safe process assuming the company you are dealing with has privacy and security policies in place to protect your information.
However, scammers may try to use KYC verification as a guise in order to steal your information; hence, always ensure that you only provide information directly to the company you are trying to become verified with. It is important to remember that KYC requires visible documentation and therefore cannot be completed over the phone; any phone call asking for personal information related to KYC is a scam.
Are There Exchanges That Do Not Require KYC?
Yes, there are many cryptocurrency exchanges that do not require KYC, Binance being the largest example. Other examples include but are not limited to Kraken, Shapeshift, and Changelly. It has been estimated that about a third of crypto exchanges have little or no KYC.
It is important to remember that although signing up without using KYC is easier and keeps your information private, you are more likely to end up dealing with malicious behavior on that platform and prone to heightened risks of attack.
Is KYC Strictly for Cryptocurrency?
No, KYC is not strictly for cryptocurrency. While it has been applied to some cryptocurrency exchanges, KYC began in 1989 as an effort to prevent fraud, tax evasion, terrorism financing, money laundering, and other financial crimes in traditional financial and non-financial infrastructures. KYC is still required by those infrastructures.
What’s the Future of KYC?
KYC requirement in the traditional financial and non-financial sectors is unlikely to change. In the cryptocurrency sphere, however, there is much debate as to what should or may come. The Financial Action Task Force updated its guidelines in June 2019, mandating that countries need to ensure that crypto-asset service providers are subject to adequate regulation and supervision or monitoring for AML and combating the financing of terrorism.
Many argue that it will be difficult to set up all the varying domestic regulatory bodies, and reporting may become a burden. In addition, it is not always possible to reliably know the identity of a beneficiary in cases wherein malicious behavior has occurred regarding the use of cryptocurrency. Chainalysis states that it would be more beneficial to collect wallet addresses of bad actors instead of all users’ personal information.
What are the Various Ways Exchanges Implement KYC?
Cryptocurrency exchanges are broadly classified in two types for determining the implementation of KYC measures and the documents required. Crypto to crypto, and crypto to fiat.
Crypto-to-Crypto Exchanges and KYC
As of 2019, crypto-to-crypto exchanges often have more relaxed KYC requirements, with about 30% of them requiring no KYC documentation, and they frequently work in a tiered manner. Binance, for example, is one of the top cryptocurrency exchanges in the world, but it requires no KYC for a basic account. With this account, you can deposit and trade cryptocurrency with no verification requirements; however, once you wish to withdraw more than 2 Bitcoin worth of crypto in a day you need to provide a photo ID verification.
Likewise, Huobi does not require any KYC documents to trade, but enforces KYC when users cross a certain account usage limit, and it has varying withdrawal limits for verified and unverified users.
Most crypto-to-crypto exchanges have been criticized for their lack of KYC proactivity. These exchanges, except for Binance, have not been reported to actively monitor or track transactions for detecting market manipulation or fraudulent behaviors.
Fiat-to-Crypto Exchanges and KYC
Fiat-to-crypto exchanges typically perform at least some level of KYC because they are dealing with fiat currency, which is recognized as a legal tender by governments. Such exchanges have to conduct business with banks and other traditional financial institutions, most of whom perform their own KYC before conducting business with external entities.
Coinbase is one of the top cryptocurrency exchanges in the world, but solely requires a user to create an account with a name, email id, and password in order to deposit and exchange their already held crypto assets using their service. However, extensive KYC verification is required if you want to buy or sell cryptocurrency.
Kraken (Cryptovantage’s Kraken Review) has five tiers of verification requirements depending on how the user intends to use their account. Like with Coinbase, once a user wants to buy and sell rather than simply deposit and exchange already held cryptocurrencies, they must provide KYC verification. The level of KYC verification you provide determines your tier.