The crypto industry may have a relatively short history, but it has surely made its mark on the financial and fin-tech landscape. After making its debut in 2009, cryptocurrency has evolved from being a thing for tech enthusiasts to a means of financial transactions. But it’s not always smooth sailing with the crypto industry, with criminals often looking for loopholes to launder money or commit fraud.
The good news is that know-your-customer (KYC) and anti-money (AML) policies are here to save the day. After all, the overall goal is to ensure Bitcoin exchanges are safe for BTC to PKR conversions and other crypto-to-fiat currency transactions, and that crime wouldn’t be so easy to carry out with digital currencies. With that being said, it’s time to explore how KYC and AML are non-negotiable for Bitcoin exchanges.
Exploring AML and KYC in Crypto
All the regulations, laws and practices that prevent people from engaging in money laundering, tax evasion, fraud and other illegal activities are grouped under AML. With financial crimes lurking in the crypto industry, they have become increasingly essential to address inconsistent regulations across various jurisdictions which criminals could easily manipulate to their advantage.
In 2014, the Financial Action Task Force (FATF) started publishing guidance on cryptocurrency AML, which the policymakers in the FATF acted upon. Today, the European Commission, FinCen, and other regulatory bodies have implemented most of FATF’s recommendations. Virtual asset service providers (VASPs) have made efforts to work with AML compliance officers and are always looking out for criminal activity in cryptocurrency transactions. According to FATF, VASPs include crypto exchanges, issuers of stablecoins like Tether, NFT marketplaces and DeFi protocols.
A subset of AML, KYC encompasses customer identity verification procedures that VASPs must implement to be on the right side of the law. Thanks to KYC processes, criminal investigators can link fictitious cryptocurrency addresses with real people or organizations when they are connected to a crime. However, crypto KYC requirements aren’t standardized; they are heavily dependent on crypto exchanges’ locations and services provided. Regardless of this, most exchanges have made it the norm for customers to share their legal names, current addresses, and government-issued IDs when joining their platforms.
Components of KYC in Cryptocurrencies
KYC in crypto operates using three main components: customer identification, due diligence, and continuous monitoring.
- Customer identification program (CIP)
CIP is all about verifying the truth about a customer’s identity using independent, accurate data such as legal name, date of birth, information on driver’s license or passport, home address, and the like. For business entities, articles of incorporation and business licenses are required.
- Customer due diligence (CDD)
CDD focuses on assessing risks that a customer may bring. That said, it’s pretty common for crypto exchanges to run background checks on their customers, perform surveys, and review client crypto profits and transaction history to determine if a client must be closely monitored.
- Continuous monitoring
VASPs must review transactions continuously to detect and stop criminal activities. If they stumble on suspicious activities, they must submit suspicious activity reports (SARs) to the appropriate law enforcement agencies.
How KYC and AML Impact Bitcoin Exchanges
With KYC and AML well put in place, Bitcoin exchanges can ensure that fraud, money laundering and other crimes will be more difficult to carry out. With KYC especially, there is a higher chance for criminals to be identified and brought to justice. In addition to this, these exchanges can prove to potential and existing clients that they take safety seriously and want no part in supporting crime. Customers will feel a lot safer and more inclined to trade on their platforms. AML and KYC policies also help exchanges demonstrate their compliance, ultimately keeping them away from fines and a tarnished reputation.
Despite these benefits, there still KYC and AML limitations that need to be straightened out, as there are still risks involved. For starters, not all exchanges may be able to keep up with the regulations, leaving their platforms and clients vulnerable. Moreover, clients on such platforms may have to forfeit anonymity as their transactions are always being monitored in addition to routine background checks and retrieval of personal details.
In Conclusion
There isn’t any iota of doubt that KYC and AML do a very good job of making crypto exchanges a safe space for financial transactions. Although there are some risks involved, the benefits shouldn’t be easily dismissed. With this in mind, Bitcoin and other crypto exchanges must take all the necessary steps to prioritize these regulations if they are passionate about minimizing financial crimes. As the crypto industry continues to evolve and many people begin to trade with Bitcoin and other digital assets, the risks for money laundering and other crimes become greater. However, Bitcoin exchanges can limit these criminal activities if they are compliant with the KYC and AML policies.
