KYC verification, an acronym for Know Your Customer, is a crucial process in the crypto and finance industry. We take a detailed look at its role, how it works and how to pass it, in this new CryptoDico.
- What is KYC in a nutshell?
- KYC (Know Your Customer) definition and origins
- What’s the point of KYC?
- The weaknesses of KYC
- Advantages of KYC verification
- Why is KYC important in the crypto industry?
- Know your customer challenges
- What is KYC in banking?
- What’s the difference between KYC and KYB?
What is KYC in a nutshell?
Having existed for many years in traditional finance, the KYC is becoming increasingly important in crypto. But what is KYC? The Know Your Customer or KYC as it is commonly called, is a procedure for verifying that users are indeed humans. And above all, that they are who they say they are!
The aim of the KYC procedure is therefore to know exactly who the customer is when applying for access to a platform or a loan from a financial institution. It is also designed to prevent identity theft, and plays a part in anti-money laundering (AML) measures.
KYC (Know Your Customer) definition and origins
The world of finance is evolving by the day. Between centralized institutions and those decentralized with cryptocurrencies, the threat of fraud is ever-increasing, and that’s where KYC comes in. Whether you’re good at English or not, you probably know what it’s all about. But do you know where it comes from?
The procedure KYC or “Know Your Customer” is primarily used to verify the identity of third parties in a company or financial institution. As a result, it aims to prevent crimes such as money laundering, through knowledge of the stakeholders with whom transactions take place.
However, while the term has become popular with the advent of social networking and the internet, it is important to point out that KYC verification has existed since the origins of financial activities themselves.
However, it only became widespread later, with the proliferation of criminal activity. Financial crime exploded, prompting regulators to give credit institutions an ultimatum. It was only later, after the September 11th 2001 attacks in the United States that KYC regulations became popular.
Regulators realized that funds were too often being used to finance illicit activities. Companies now had to know who their customers were, what they were doing, and where their capital was coming from.
Today, the blockchain industry is taking up more and more space with the advent of digital assets. With this in mind, the scope of monitoring is growing, increasing the workload.
But enough definitions of KYC and let’s answer another question: what’s it for?
What’s the point of KYC?
KYC is a process implemented by companies and financial institutions. It enables them to verify the identity of their customers and assess the risks associated with their activities. It is a regulatory requirement in many countries, notably France.
KYC is a constantly evolving process. Legislation to combat money laundering and the financing of terrorism is becoming increasingly stringent. As a result, the financial world is increasingly confronted with stricter KYC requirements.
For example, the European directive MiCA, which is due to come into force in 2024, provides for firmer KYC requirements. These mainly concern cryptocurrency exchange platforms. In this sense, it has a major role to play. Among others:
Obtaining and verifying customer information
The first step in KYC is to obtain customer information. This may include:
- Identity (surname, first name, gender, place and date of birth, etc.);
- Address ;
- Sources of income ;
- Its business activities.
This data can be collected on the basis of a declaration by the customer and through official documents such as: identity card, passport, proof of address, etc., but also through interviews or surveys. It can also be collected through interviews or surveys.
Assessing customer risk
Once customer data has been collected, it needs to be evaluated. This will determine the level of risk they represent.
This is where KYC documents come in! These enable a company to use their data to identify at-risk customers, assess the dangers and comply with legal constraints that have become increasingly stringent over the years.
Risk factors can include:
- The customer’s country of origin, as regulations vary according to nationality or place of residence;
- Professional activities;
- Financial history ;
- His behavior during the interview.
This assessment enables the company to determine the vigilance measures it needs to adopt to protect its activities.
Monitor customer activity
Once a customer relationship has been established, it is important to monitor customer activity to detect any suspicious behavior.
It is with this in mind that KYC regulations allow a firm to monitor the activity of its consumers. Indeed, such monitoring can help identify suspicious transactions or behavior that could be associated with criminal activity, or even block certain operations, which would be prohibited in certain specific jurisdictions. This may include:
- Unusual or large transactions;
- Cash withdrawals;
- Money transfers to high-risk countries;
Customer data must be updated regularly, especially if it changes. This enables the company to ensure that data is always up-to-date and that risks are correctly assessed.
As you may have already guessed, the KYC is an essential component of the AML (Anti Money Laundering)the fight against money laundering. Unfortunately (or fortunately?), it is not without its faults.
The weaknesses of KYC
No process is perfect, and KYC is no exception.
It is indeed a costly process, as it mobilizes several resources to check the documents provided, investigate the customer’s identity and assess the risk.
Frequently changing regulatory measures (particularly in the crypto sphere), a company may be obliged to ask its customers to undergo several KYCs.
Although it is a tool for effectively combating financial crime, KYC has a very poor image in the crypto ecosystem.. As a result, it is not uncommon to see a company’s business and sales plummet when a KYC system is put in place …
But then why persist in implementing it in the crypto industry?
Advantages of KYC verification
Know Your Customer (KYC) may seem burdensome, but it has many benefits for banking institutions and customers alike. Such as:
Facilitating risk assessment
One of the main benefits of this verification is that it enables companies to better assess dangers. By collecting information on identity, activity, and sources of income, companies can identify high-risk customers. These are often people involved in criminal or terrorist activities.
Combating identity theft
Identity theft is a growing problem that can have serious consequences for companies and individuals alike. Customer knowledge can help combat identity theft by requiring customers to provide verifiable identification information. This prevents fraudsters from using stolen identities to open accounts or carry out transactions.
Improving trust and security
KYC can also help to improve trust and security between firms and their customers. In fact, customers feel better when they know their data is safe. This is frequently a guarantee that their transactions are transparent. What’s more, it can lead to increased customer satisfaction and reduced litigation risks.
Reduce the risk of money laundering
Money laundering is the criminal activity of concealing the illegal origin of funds. With KYC verification, companies can slow down this phenomenon. It’s a sure way of identifying high-risk customers and preventing suspicious transactions.
Why is KYC important in the crypto industry?
KYC is of paramount importance for both customers and financial organizations. It enables :
In 2020, the FinCEN (Financial Crimes Enforcement Network) proposed extending the KYC standard to participants in the crypto market. These requirements for the crypto industry are as follows:
- Companies must collect information about the identity of their customers. This includes their name, address, date of birth and identification number.
- Companies must verify the identity of their customers by requesting identity documents. These involve a passport or driving license.
- Establishments must retain customer information for a period of five years.
These rules are important for the crypto industry, as tax fraud is a serious crime that involves concealing the illicit origin of capital. Fraudsters often use it to fund terrorism, drug trafficking and other illegal activities.
Maintaining a healthy ecosystem
The demands of the KYC process can also help protect consumers. By ensuring that their customers are who they say they are, companies can help prevent scams and other frauds.
As the crypto industry continues to grow, it is increasingly exposed to the risk of fraud and money laundering. As a result, it is an important measure to help combat this risk and protect consumers.
Know your customer challenges
KYC faces a number of challenges in the world of finance:
One of the main challenges of KYC in the crypto market is the protecting user privacy because establishments have to collect sensitive personal information. They need the name, address, date of birth and IP address of their customers. Unfortunately, this data can be used for malicious purposes, such as identity theft or targeted marketing.
The maintenance of a KYC system can be costly for companies. These systems require investment in technology, personnel, and dedicated training and knowledge. This may discourage some companies from taking the plunge.
There are no standard norms for KYC in the cryptocurrency industry. This can make it difficult to integrate and verify data between different institutions.
Despite these challenges, KYC controls are necessary to improve the ecosystem. They also help to strengthen the transparency and reputation of crypto exchanges. To achieve this, managers need to implement systems that protect users’ privacy. This, while meeting regulatory requirements.
What is KYC in banking?
A KYC in banking or Know Your Customer in banking is a regulatory requirement in many countries. In the banking sector, KYC also involves collecting personal data from customers. This data is then checked against external sources, such as government registers or fraud databases.
This procedure is generally carried out when a bank account is opened. However, it can also be useful at other times, such as when personal or professional circumstances change.
Banks must also check whether their customers are on a blacklist. This lists individuals or entities involved in illegal activities. It is generally maintained by public authorities or private organizations. Consequently, if a customer is on this list, the bank must refuse to open an account.
What’s the difference between KYC and KYB?
Visit KYC and the KYB have many similarities, particularly regarding their final objective. Indeed, like KYC, KYB aims to combat fraudulent transactions and provide a healthy environment for customers.
But while the two processes are much the same, they also have a big difference: the type of customer.
The fundamental difference between KYC and KYB is that the former applies to natural persons, while the latter corresponds to legal entities and companies.
The information requested in a KYC procedure varies according to the nature of the financial institution and the type of service provided. However, the most common information requested is as follows:
- Full name : Full name as it appears on your ID ;
- Nationality: to check if your country of origin is blacklisted;
- Passport photo : recent, generally required to verify your identity ;
- Email : so that the financial institution can contact you if necessary;
- Date of birth : to verify that you are over 18 or 21;
- Phone number: to facilitate communication with the financial institution;
- Verification: The financial institution may ask you to provide other documents to verify your identity, such as a copy of your ID or driver’s license.
Customers can send their KYC documents directly online, or drop them off in person.
KYC is today a crucial element of the cryptocurrency industry. It enhances security, transparency and regulatory compliance. As a result, the widespread adoption of KYC by exchange platforms strengthens investor confidence.
It also contributes to the legitimization of the crypto industry. Banking institutions are adopting secure practices in their data management, which are being strengthened over the years under the pressure of ever-stricter regulatory constraints. Blacklists can also be an excellent way of preventing fraud. As you’ll have guessed, cryptocurrency operations eventually come under the same rules as the banking industry. So, whatever happens, always make sure you stay in compliance with your country’s law.
Passionate about stock market trading and cryptocurrencies, I write articles on the subject to share my experience and keep you up to date. I’m convinced that cryptocurrencies open up new perspectives and that everyone should experiment with them.