kyc crypto

KYC in Crypto: Why is it Important for Crypto Exchange?

Cryptocurrencies are disorganising the finance industry. Yet, because of its secure network, transactions take place abruptly and usually remain anonymous. This is one of the reasons crypto transactions provide opportunities for financial terrorists and criminals to escape traditional AML regulations.

According to research, in 2021, a sum of illegal cryptocurrency transactions was found to be $14 Billion. However, in 2022, it has been found that almost $10 Billion in cryptocurrency was held in illicit addresses.

With the rise of cryptocurrency crimes and fraud, industries are now paying more attention to making their companies AML and KYC crypto-compliant to prevent financial fraud. Particularly, these firms must determine the anonymous activities associated with cryptocurrency transactions. It takes place by implementing reliable KYC regulations to know their customer and how they’re using these services.

What is KYC in Crypto?

KYC crypto refers to a set of processes by financial organisations that are implemented to identify customers’ identities. The first phase of KYC is due diligence in Anti-Money Laundering and helps these companies to recognise any risk associated with the client before onboarding them.

KYC is also required in cryptocurrency exchanges in order to remain compliant with AML standards. KYC prevents financial crimes such as money laundering by identifying customers’ identities.

Money laundering in crypto refers to concealing the sources of money acquired in illicit ways. Yet, financial terrorism is the practice of providing financial aid to individuals or organisations involved in terrorism. Both of these acts fall under financial crimes and are considered extremely illegal which can pose a critical threat to global security.

How Does KYC Crypto Work?

KYC in crypto works the same as it works for other financial institutions. However, the process goes through several steps such as:

   a. Customer Data Collection

First of all, when the customer signs up for an account on a cryptocurrency service provider that requires KYC, their data is collected. The client needs to provide personal information including their full name, address, and government-issued identification. This information is utilised to verify the customer.

   b. Verification Process

Later on, these service providers verify the data and compare it with the database information and other sources to confirm the customer’s identity. This step involves procedures such as checking ID documents against a government database, verifying addresses and conducting background checks.

   c. Customer Onboarding

Once the verification process is complete and in case the company is satisfied with the customer, they approve user onboarding. And, the user is able to access their services.

How is KYC Crypto Important?

Many cryptocurrency service providers are now moving towards implementing KYC compliance regulations despite the hurdles they might face during the process. This is because doing this can deliver numerous benefits not only to the organisation but to the clients as well. However, KYC in crypto is important in numerous ways:

   i. Reduced Fin-crimes and Money Laundering

It has been found that for more than 15 months, an astonishing number of people including 46,000 individuals have claimed that they have been victimised by crypto fraud. However, its consequence was a huge loss of over one billion dollars. Therefore, by implementing KYC in crypto and conducting powerful identity verification procedures, these risks of fin-crimes and money laundering can be improved efficiency and enhance a company's reputation in the market.

   ii. Better Market Sustainability

Well, it is obvious that the cryptocurrency industry is known for its high sustainability and volatility. This is because of its regularity of anonymous and shadowy financial activities or transactions. Thus, integrating KYC crypto compliance standards with boosted due diligence and verification processes can play an essential role in sustaining the market and promoting its growth and revenue.

   iii. Reputational Damage Control

In case of data breach or hack, the KYC practices in cryptocurrency help these firms to remain equipped with any kind of fraud and protect their market repute. Moreover, these exchanges can rapidly take actions such as freezing anonymous accounts that might be involved in illegitimate activities.

   iv. Diminished Legal Risks

With the change of legal norms and standards, crypto businesses now obtain more KYC regulatory practices to remain compliant and stay on top. These practices enable them to reduce identity theft or identity fraud, evaluate customer risks, and avoid money laundering practices by verifying customer information. By doing so, these crypto firms are able to minimise regulatory risks and threats and allocate more resources to boost their revenue, smoothen transactions, and ensure compliance.

   v. Increased Trust Among Users

In addition, KYC crypto is important because of the identity verification processes that help build more trust among customers. It is also useful with regard to user trust and transparency. When customers make sure that the cryptocurrency exchange service providers are using proactive measures to protect their accounts. These users are more likely to keep acquiring your services because of strong relationships with the company.

Bottom Line

Incorporating KYC crypto compliance standards or regulation is essential to prevent the industry from financial crimes such as money laundering. With the rise of technologies, cybercriminals are becoming smarter and finding more sophisticated ways to commit fin-crimes. Therefore, when cryptocurrency exchange service providers integrate KYC, it delivers numerous benefits and makes them securer.

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