What is Know Your Customer (KYC) for Cryptocurrency?

Why Does Crypto 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.

KYC Requirements for Crypto

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 such as a driver’s license or passport
• 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.

Can You Buy Crypto Without 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.

There are also some peer-to-peer crypto exchanges where you can buy crypto directly from another person but those options have a significant amount of risk.

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.

KYC — while inconvenient — helps combat criminal activity (such as money laundering) and underage crypto trading.

Of course you could also argue that providing KYC isn’t good for consumer privacy. The fact remains that most major crypto exchanges require some form of identity verification.

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.