Know Your Customer (KYC), also referred to as ID verification, is an identity verification process that financial service providers have as a regulatory requirement for their users in order to combat financial crimes such as money laundering.
KYC verification helps financial service providers and users to comply with local and international laws and regulations, increases the level of confidence between users and financial service providers when managing legal risks, and protects the assets of all parties on the platform or service.
Although KYC provides greater security for the user and service provider, there are participants in the cryptocurrency economy that shun KYC because they believe that it reduces anonymity and decentralization – two of the principles behind the creation of the first cryptocurrency, Bitcoin.
What is the KYC process?
Opening a personal account in a cryptocurrency exchange like Huobi is usually an easy and intuitive process. On some platforms and in some jurisdictions, a user may be allowed to receive crypto assets on their account on the platform without the need for KYC. However, an incomplete KYC process will result in limited functionality within the exchange.
One of these limitations is the ability to convert or withdraw these assets from the exchange, especially the ability to convert crypto assets into fiat money. Leading exchanges also require the user to complete KYC processes to access other advanced functions such as spot trading, P2P trading, and derivatives trading.
In the KYC processes, it is common that the user be asked to provide one or more of the following documents:
- National identification document
- Driver’s license
- Face recognition via web or telephone
- Proof of residency
These documents allow the financial institution to verify the identity of the client, his address and place of residence. Sometimes other documents are also requested, such as bank account statements or utility bills. In some jurisdictions, financial service providers are also required to re-verify the identity of their clients on a regular basis.
What is the regulatory body in compliance with the KYC?
KYC regulations vary by country, but there are international agreements that specify the basic information required.
In the US, the Bank Secrecy Act and the Patriot Act form the basis for most of the current anti-money laundering (AML) and KYC processes.
In the European Union, the Anti-Money Laundering Directive (AMLD) and PSD2 regulations provide the frame of reference in its member states.
At the global level, multinational cooperation on regulatory conditions is coordinated by the Financial Action Task Force (FATF).
Advantages of KYC
- Financial service providers can more easily assess their risks by having a customer’s identity and financial history.
- The financial institution’s clients have greater confidence and security on the part of the financial service providers, as they are sure that their data and transactions are managed correctly.
- Clients also have confidence in dealing with each other on the platform because the risk of dealing with a criminal or dirty money is dealt with.
- Identity theft and other types of financial fraud can be prevented, and the risk of money laundering is reduced, which lowers the crime rate in a country as well as globally.
Disadvantages of KYC
- Cost associated with KYC controls, which are typically offset by fees and commissions.
- Some people do not have the documentation required in the KYC controls or do not have a fixed address, which is why they are unable to access certain services.
- Poor security and data management in some financial service providers can lead to hacks and, consequently, the theft of users’ personal data.
- The presentation of user identification information on cryptocurrency exchanges does not contribute to the anonymity and decentralization aspects that characterize cryptocurrencies.
KYC processes are a globally regulated requirement for financial service providers and cryptocurrency exchanges. Although these controls have their drawbacks, they are important and beneficial for the user and the exchange since they provide security to all parties on the platform. Furthermore, they contribute significantly in the fight against money laundering, fraud, and other crimes.
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