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Within just thirteen years of existence, cryptos have redefined the way people deal with fiat and digital money. It’s also a little surprising that cryptos have redefined money laundering.
In the past ten years, the increase in crypto-based scams and frauds have garnered a lot of attention from investors, traders, regulators, and law enforcement agencies. These scams vary from Ponzi schemes to fake crypto-job listings and fake giveaways to pump-an-dump schemes, causing huge financial losses to innocent people. Law enforcement agencies and regulators use Anti-Money Laundering (AML) and Know-Your-Customer (KYC) policies to safeguard investors and traders.
In this blog, let’s understand what are AML and KYC and their importance in the crypto industry.
What is Know-Your-Customer (KYC)?
The KYC process is a procedure used to confirm a client’s or customer’s identification. This can be accomplished using official identification documents, such as a passport or driver’s license, or alternative methods, including utility bills or bank statements. KYC’s objectives are to verify that the client or customer is who they claim to be and to stop money laundering and other illegal actions.
When it comes to crypto, the KYC process is the first step in Anti-Money Laundering (AML) due diligence and aids crypto companies in assessing the level of risk connected with a consumer.
KYC is necessary for crypto exchanges to follow AML requirements. Exchanges can aid in preventing illicit behavior like money laundering and the financing of terrorism by confirming the identities of their customers.
To comply with KYC laws, exchange customers may be asked to produce additional evidence to prove their identity. Once the exchange has confirmed a customer’s identification, they can only create an account and start trading.
For detailed information, read here.
What is Anti-Money Laundering (AML)?
Money laundering is the processing of monetary assets in a bank or other financial institution to disguise their illegal source. Additionally, several steps in the Anti-Money Laundering (AML) process aim to maintain the rules and laws about money laundering. Additionally, AML rules are designed to prevent the processing of funds obtained illegally from activities including tax fraud, drug sales, human trafficking, and terrorism.
Relation between AML and KYC
Though distinct, KYC (Know-Your-Customer) and AML (Anti-Money Laundering) work in harmony to combat illicit financial gains from entering the system. Initially, most financial institutions commence compliance procedures with KYC. Under KYC, financial service providers cross-check new clients’ names against criminal databases and employ screening processes to spot suspicious entities.
Within the KYC process, scrutiny extends to political figures and their immediate family members. Once client funds’ legitimacy is confirmed, they gain access to the financial system. Subsequently, AML procedures become operational. Once inside the system, illicit funds undergo multiple transactions, obscuring their origin—a process termed “layering.” Post-layering, these cleansed funds can flow into investments like real estate and various financial instruments.
KYC primarily aims to prevent illicit fund deposits. This involves ongoing due diligence, with periodic customer record checks for accuracy and compliance. Financial institutions evaluate client risks through due diligence, pinpointing potential compliance issues. High-risk individuals may undergo cross-referencing with AML and sanctions lists as part of this process. Additionally, due diligence assessments unveil transaction details and beneficiaries linked to suspicious activities.
Importance of KYC and AML in the crypto industry
Role of AML and KYC in advancing crypto adoption
Cryptos like Bitcoin are well-known for their ability to offer financial freedom beyond traditional financial systems. However, to achieve widespread adoption, cryptos must prioritize safety and user-friendliness. While compliance may not be the top concern for many investors, the institutional acceptance of blockchain and Web3 technologies heavily depends on a robust regulatory framework.
Role of regulatory frameworks
The regulatory frameworks play a crucial role in enhancing the public perception of cryptos and blockchain technology. AML and KYC procedures in the crypto space enable Web3 companies to maintain compliance and operate without the fear of regulatory crackdowns.
Additionally, these procedures contribute to legitimizing the industry by ensuring user safety and preventing the use of crypto assets for money laundering. Customer due diligence empowers crypto exchanges to identify potential criminals and monitor the activities of those considered “high risk.”
Mitigating scams and hacks
In the world of cryptos, scams and hacks are unfortunately prevalent. Regulatory frameworks like AML and KYC play a vital role in reducing these risks. They also act as a protective shield for users, preventing them from falling prey to malicious activities. By enhancing the overall image of the blockchain industry, KYC and AML measures can attract more investment into Web3 technologies. Furthermore, they can serve as foundational elements for enterprise-level blockchain solutions.
AML (Anti-Money Laundering) and KYC (Know-Your-Customer) are pivotal safeguards in the crypto industry. KYC verifies user identities through official documents and helps crypto companies assess risks. AML, on the other hand, prevents illegally obtained funds from being processed through financial systems, aiming to combat activities like tax fraud and terrorism financing. Together, they create a robust regulatory framework, enhancing public trust and attracting investments in cryptocurrencies and blockchain technology.
By ensuring user safety, preventing money laundering, and mitigating scams, AML and KYC measures protect the industry and serve as a foundation for its growth and legitimacy.Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.