Importance of KYC in Crypto Exchanges

By October 7, 2022October 9th, 20224 minute read

As the world is shifting more and more to a digital future, a growing number of organizations are starting to accept crypto as a payment method. However, as the use of digital currencies becomes more widespread, so does the number of people who are the targets of scams and fraud. Businesses need to implement efficient Know-Your-Customer (KYC) rules and procedures to safeguard themselves and their clients.

In addition to discussing the advantages of KYC compliance in general, this article will attempt to clarify the idea of KYC verification. Let’s get started!

What is KYC in crypto?

The KYC process is a procedure used to confirm a client’s or customer’s identification. This can be accomplished by using official identification documents, such as a passport or driver’s license, or by using 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.

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Benefits of KYC in crypto exchange

Despite the operational adjustments and difficulties brought on by KYC laws, crypto exchanges stand to benefit significantly from maintaining compliance, including:

  • Increased customer transparency and trust

Verifying user identities can increase transparency and foster client trust. In addition, users are more likely to be with your business if they believe your crypto exchange is taking proactive and preventative measures to protect their accounts.

  • Decreased risk for money laundering and other scams

According to Forbes, there were over 80,000 incidents of crypto fraud in the US last year, a 24,000% increase from 2016. Robust identity verification can drastically lower fraud and improve a company’s reputation in the market.

  • Reduced legal risk

Implementing strong KYC processes can keep businesses ahead of the curve because legal requirements are constantly changing. Instead of trying to catch up, they can concentrate on increasing conversion rates, expediting transactions, and assuring compliance with changing international regulations. Companies can lower their risk of facing legal challenges or regulatory penalties by proving KYC due diligence.

  • Improved stability of the crypto market

The crypto market is notably volatile, in large part due to anonymous transactions that are suspicious or illegal. However, the market as a whole can be stabilized, and its market value increased with increased identity verification as part of KYC initiatives.

Risks involved in KYC implementation

The crypto industry’s regulatory landscape is evolving, and relatively recent criminal practices make KYC compliance difficult. As a result, crypto exchanges should be aware of the following shortcomings and dangers when developing and implementing their KYC solution:

  • Anonymous transactions: Money launderers are given a degree of online anonymity through crypto exchange transactions. Exchanges should therefore make an effort to leverage digital controls to direct their identity verification procedure, including gathering client biometric data like face, voice, and fingerprint scans.
  • Transaction speed: The speed at which crypto funds can be moved between accounts frequently exceeds AML/CFT requirements. Exchanges must ensure that their internal AML/CFT checks and tracking procedures may be used before sending money to user wallets.
  • Structured transactions: Money launderers may try to avoid reporting requirements by spreading out their transactions over several accounts in tiny amounts. Crypto exchanges need to ensure that their controls stop people from opening multiple accounts and that they share information with other financial service providers to spot and prevent structuring techniques.
  • Money muling: By pressuring or rewarding third parties, also referred to as “money mules,” to use crypto exchange services on their behalf, money launderers may try to exploit the weaknesses of crypto transactions further. By performing the necessary due diligence and identifying consumers whose profiles do not match their wealth or expected financial behavior, exchanges should try to identify money mules.

Conclusion: Is KYC a secure way in crypto?

The KYC procedure aims to stop financial crimes like money laundering and financing for terrorism. Exchanges can screen out malicious individuals and maintain the security of their systems by mandating that users provide personal information. The KYC procedure is not without flaws, though. For instance, users may find it tedious and frustrating. Additionally, there is always a chance that hackers will use trades to obtain customer data.

Overall, the crypto community views the KYC procedure as a necessary evil. Although it isn’t flawless, it’s one of the best ways to protect exchanges against fraud and criminality.

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.
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Harshita Shrivastava

Harshita Shrivastava

Harshita Shrivastava is an Associate Content Writer with WazirX. She did her graduation in E-Commerce and loved the concept of Digital Marketing. With knowledge of SEO and Content Writing, she knows how to win her content game!

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