The growing popularity of buying and trading cryptocurrencies around the world has naturally resulted in a significant increase in the popularity of crypto exchanges. Binance, Kraken, and eToro are names that will be familiar to anyone who has decided to invest in cryptocurrency in recent times. However, as cryptocurrency trading grew in popularity, some concerns arose. One of the most important is: What about KYC for cryptocurrency trading?
What are crypto exchanges?
Crypto exchanges are online marketplaces where you can buy and sell cryptocurrency. Unlike stock trading, you cannot purchase cryptocurrencies through a bank or an investment firm. Crypto exchanges are the best place to get Ethereum, Bitcoin, or any other cryptocurrency on the market.
The number of users and money involved in cryptocurrency trading is constantly increasing. According to CoinGecko, the total crypto market has increased by more than 600% from $397 billion on November 3, 2020 to $2.8 trillion on November 2, 2021.
At the same time, it is estimated that over 1.6 billion dollars in cryptocurrency was used in that same year to commit identity fraud, money laundering, and other financial and cybercrimes.
KYC for crypto exchanges? What it can do.
KYC is an abbreviation for “Know Your Customer.” A KYC process is considered the first stage of due diligence in AML (anti-money laundering) procedures. When an institution onboards a new customer or user, the platform verifies their identity to confirm their identity and uses document verification to verify any document. It also assesses risk value.
Regulations for specific industries often dictate what information is actually required from customers, as well as how that information is gathered, processed, and verified.
Proper KYC for cryptocurrency exchanges improves security for both parties – traders and trading platforms. It also ensures that the services are used appropriately and for valid reasons. It not only serves as a foundation for regulatory and legal compliance, but it also eliminates the risk of money laundering and other financial crimes committed through cryptocurrency trading.
What are the primary risks associated with a lack of proper KYC for crypto exchanges?
- Through anonymous user accounts, there is an increased risk of money laundering and terrorist financing.
- The absence of monitoring and control over the transactions of users on watch lists or who have previously been involved in financial crimes.
- Making identity theft crimes possible
What are the advantages of KYC for crypto exchanges?
It’s useful to look at different financial organizations and industries to see why appropriate KYC procedures are helpful for cryptocurrency exchanges and their users globally. Although KYC requirements for crypto exchanges vary, the purpose remains the same for all: to ensure the safety, transparency, and fair trading of crypto assets and cryptocurrencies.
Increasing client confidence
It’s one of the most critical criteria for KYC exchanges, particularly on peer-to-peer crypto trading platforms where users trade with one another.
Assessment of the dangers
KYC methods and accurate user identification verification allow exchange platforms to assess the risk level of each customer, identify potential dangers, and better manage certain groups of customers.
Fraud risk is reduced
One of the most critical aspects of ensuring the safety of any platform and its users is risk assessment of individual customers. Cryptocurrency exchanges will be able to identify potential risks and hazards earlier and establish appropriate procedures to prevent fraud, scams, and financial crimes.
Features that KYC can offer:
There are several features that can help in verification making crypto exchanges safe and smooth.
- Live video verification. In order to assure the highest level of compliance and safety, a video identity verification solution was developed. The procedure entails a live video chat with a highly trained operator who, using AI and machine learning techniques, verifies a user’s identification, as well as the legitimacy and legitimate ownership of the supplied identity document. The entire procedure is recorded, and the video can be seen again.
- Self-Verify. Automated video identity verification technology that allows users to verify their identities without the presence of an operator. However, after the verification is accomplished, the entire procedure is recorded and double-checked by a professional operator.
- PEP and Sanctions Check with KYC compliance
- Proof of Address
- Manual KYC, which means taking care of all of your KYC obligations.
Increasing expectations of cryptocurrency exchanges – global rules tightening:
According to a study conducted by Cypher Trace at the end of 2020, about 56 percent of cryptocurrency exchanges were not complying with conventional KYC standards and procedures at the time.
The great majority of non-compliant crypto exchanges, according to the report, were situated in Europe, the United States, Russia, and Singapore.
Cryptocurrency’s association with a complete lack of regulations and control is gradually fading. Leaders all over the world have recently begun to enact new rules and regulations that are aimed squarely at crypto exchanges and other crypto-related enterprises, in order to seal the door on individuals who use crypto trading for illegal purposes like money laundering.
China, for example, has outright prohibited cryptocurrency trade.
Crypto-related enterprises are classified as money service businesses in Canada, and they must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Canada has also raised its expectations for crypto exchanges in 2021, requiring them to verify their users and comply with KYC laws on the same basis as other financial institutions.
Exchanges in the United Kingdom must register with the Financial Conduct Authority (FCA). In addition, the regulator has imposed a set of precise KYC/AML criteria that crypto exchanges must adhere to.