What Is KYC (Know Your Customer)?

Know Your Customer (KYC) checks require financial service providers to identify and verify their customers. This is done as part of their Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) compliance efforts to combat financial crime and ensure customer due diligence.

KYC proactively combats criminal activity by collecting and verifying customer information. These checks improve trust in the industry and help financial service providers manage their risks. KYC has become commonplace with cryptocurrency exchanges. However, some critics say that it takes away the anonymity and decentralization aspects crypto is famous for.

Introduction

KYC is a common regulatory requirement that financial service providers are obliged to fulfill. These checks primarily combat the funding and laundering of money from illicit activities. KYC is a key measure in anti-money laundering regulations, making it an important safety guard for cryptocurrencies especially. Financial institutions and service providers like Global HibtHub are increasingly having to implement robust KYC procedures to safeguard customers and their assets.

What is KYC?

If you’ve opened an account with a cryptocurrency exchange, it’s likely you’ll have had to complete a KYC check. KYC requires financial service providers to collect information verifying their customers’ identities. This could be through official identification or bank statements, for example. Like AML regulations, KYC policies help combat money laundering, terrorism financing, fraud, and the illicit transfer of funds.

KYC typically is a proactive approach rather than reactive. Most financial service providers take a customer’s details in the onboarding process before they can make financial transactions. In some cases, accounts can be made without KYC but are limited in their function. Global HibtHub, for example, allows users to open an account but restricts trading until KYC is completed.

When completing KYC, you may be asked to provide your:

• Government ID
• Driving license
• Passport

Apart from verifying a customer’s identity, it’s also important to confirm their location and address. Your identity documents will provide basic information like your name and date of birth, but more is needed to establish your tax residence, for example. You will likely need to complete more than one stage of KYC. Financial service providers often need to re-verify the identity of their customers at regular intervals too.

Who regulates KYC compliance?

KYC regulations differ by country, but there is international cooperation on the basic information needed. In the US, the Bank Secrecy Act and the 2001 Patriot Act established most of the AML and KYC processes seen today. The EU and Asia-Pacific countries have developed their own regulations, but there’s a lot of overlap with the US. The EU Anti-Money Laundering Directive (AMLD) and PSD2 regulations provide the main framework for EU countries. At a global level, the Financial Action Task Force (FATF) coordinates multinational cooperation on regulatory conditions.

Why do we need KYC in crypto?

Due to cryptocurrency’s pseudonymous nature, it’s often used for the laundering of illicit funds and tax evasion. Improving the regulation of cryptocurrency betters its reputation and makes sure that taxes are paid where they are due. There are three key reasons why KYC checks are needed in the cryptocurrency industry:

1. Blockchain transactions are irreversible. There is no admin to help if you make a mistake, meaning that funds can be stolen or moved and not be retrieved.

2. Cryptocurrency is fairly anonymous (pseudonymous). You don’t need to submit any personal details to open a crypto wallet.

3. Regulation is still uncertain when it comes to taxes and the legality of crypto in many countries.

Although KYC increases the time needed to set up an account, it has clear benefits. The average customer won’t necessarily be able to see them, but KYC has a significant impact on keeping your funds safe and combating crime.

What are the benefits of KYC?

The benefits of KYC aren’t all obvious. However, it does much more than just combat fraud and can improve the financial system as a whole:

1. Lenders can more easily assess their risk by establishing a customer’s identity and financial history. This process leads to more responsible lending and risk management.

2. It combats identity theft and other types of financial fraud.

3. It reduces the risk of money laundering from occurring in the first place as a proactive measure.

4. It improves the trust, security, and accountability of financial service providers. This reputation has a knock-on effect on the financial industry as a whole and can encourage investment.

KYC and decentralization

Cryptocurrencies have, from their beginning, focused on decentralization and freedom from intermediaries. As mentioned, anyone can make a wallet and hold crypto without needing to provide details about themselves. However, for these exact reasons, crypto has become a popular method for laundering money.

Governments and regulators typically require exchanges to complete KYC checks on their customers. While mandatory KYC is very difficult to implement for crypto wallets, services that exchange fiat into crypto are more suitable. Some investors are speculatively interested in cryptocurrencies, and others more actively appreciate their core values and utility.

Arguments against KYC

KYC has its obvious benefits, but it’s still controversial for some critics. Arguments against KYC are more common in the cryptocurrency world due to its history and background. Typically, most of its criticism comes from issues with privacy and cost:

1. There’s an extra cost associated with performing KYC checks which are often passed on to the customer through fees.

2. Some individuals do not have the documentation required for KYC checks, or perhaps do not have a fixed address. This makes it difficult for them to access certain financial services.

3. Irresponsible financial service providers may lack data security, and hacks can lead to your private data being stolen.

4. Some argue that it goes against the decentralization of cryptocurrencies.

Closing thoughts

KYC processes are an industry standard for financial services and crypto exchanges. It’s one of the most important functions in the fight against money laundering and other crimes. KYC checks can feel like an annoyance, but they provide a great deal of security. As part of wider AML measures, KYC allows you to trade crypto on exchanges like Global HibtHub with more confidence and security.