As the cryptocurrency industry continues to grow and mature, businesses in the industry have been asked to implement KYC processes similar to those adopted by financial services businesses. 

In this guide, we’ll cover what these crypto KYC processes involve, why they need to be implemented, and the benefits they provide. 

Cryptocurrency transactions between users are generally anonymous and take place in seconds. Due to the speed of the transactions and the anonymity provided, criminals sometimes use cryptocurrencies in an attempt to evade conventional controls relating to money laundering.  

However, global regulators are beginning to pay closer attention to crypto transactions. Now, crypto exchanges and wallet providers are being asked to address the anonymity concerns associated with cryptocurrency transactions by implementing suitable know your customer (KYC) processes.

Crypto KYC is the first step in the anti-money laundering (AML) due diligence process. When a financial institution such as a crypto exchange onboards a new customer, they must use KYC processes in order to identify and verify the customer’s identity. In carrying out the process, they must also assess the customer’s risk profile and the nature of the business relationship.

KYC is now mandatory for most crypto exchanges and crypto wallet providers because they’re defined as MSBs (money service businesses) under federal regulations in the US.

It’s thought that enforcing crypto KYC compliance will help tackle malicious activity adjacent to the crypto space, such as ransomware attacks. At present, attackers are able to leverage the anonymity provided by decentralized cryptocurrencies to evade detection.

On top of this, regulators and industry leaders also hope that the introduction of crypto KYC processes will help improve the crypto sector’s public image. This is because stronger compliance procedures could help crypto shed its perceived association with money laundering and other criminal enterprises.

By its very nature, the crypto industry is prone to problems regarding KYC. After all, the blockchain and decentralized services as a whole have been designed specifically to promote anonymity and to shun central authorities.

Due to this, many crypto firms have no idea who their customers are. Plus, many crypto buyers and traders have traditionally prized their privacy and have no desire to share their personal data with either crypto providers or the government. Instead, they feel that KYC checks are intrusive and unnecessary during the onboarding process.

However, in recent years, regulators have successfully convinced many of the world’s largest crypto firms that the current situation is unacceptable. Faced with the prospect of huge penalties and fines, even the most reluctant crypto firms have been compelled to introduce crypto KYC measures. This is partially because companies who have failed to implement effective crypto KYC safeguards have faced fines in excess of $100 million.

On top of this, the crypto market remains in flux. After all, although reputable crypto firms have now implemented KYC measures, it remains possible for investors to buy crypto without going through KYC processes. However, these exchanges are incredibly risky to use.

Similarly, around the world, crypto KYC measures vary. For example, in the US, FinCEN requires cryptocurrency exchanges to use KYC standards and also practice anti-money laundering measures to achieve regulatory compliance. However, in the EU, standards are not currently as high.

Some experts in the crypto space believe that successfully incorporating KYC into blockchain platforms would be a positive change. This is because using blockchain technology for KYC would provide:

On top of this, blockchain technology could also offer regulators a better understanding of how customers have been onboarded. If all actions by financial institutions are fully recorded and tracked, all activity data will be fully auditable. This information would also help regulators to better understand customer activity.

Plus, by using blockchain technology for crypto KYC, financial institutions will also be able to improve the customer experience by making processes more timely and efficient.

Now crypto businesses are regulated as financial institutions, they must integrate KYC processes into their anti-money laundering programs. In doing so, they must take appropriate steps to:

Collect appropriate personally identifiable information (PII) from the customer

 Acquire a better understanding of the customer’s activities

Determine the probability that the customer poses a money laundering risk

To do this, most crypto exchanges and wallet providers will follow these steps:

Step one: Collect the customer’s PII, including their full name, date of birth, and address

Step two: Compare this information to a government-issued document, such as a passport or driving license. During this step of the process, the business must also verify the authenticity of the government-issued document

Step three: Ask the customer for a selfie. This is then used to verify that the person who is providing the information is the person who is pictured on the government-issued document

Step four: Verify the customer’s identity against official databases that contain information on politically exposed persons (PEP) and sanctioned individuals

In carrying out these steps, crypto businesses can determine the risk of money laundering and financial crime involving virtual currencies for each client. If required, they can then carry out additional due diligence checks. If the customer passes these checks, they can then be allowed to access the service.

However, the crypto KYC process doesn’t end when a customer has been successfully onboarded. This is because the customer must also be monitored on an ongoing basis. This is to ensure that any suspicious transactions can be spotted and, if necessary, reported to authorities.

Although there’s some opposition to KYC in the crypto space, the process actually provides businesses with a number of benefits, including:

Crypto KYC can increase transparency and trust among customers. This is because, when all user identities are verified, customers will feel confident that their crypto exchange is taking proactive and preventive measures to protect their account and their crypto. As a result, they’re more likely to continue using the service because they trust it.

When all identities are verified and crypto exchanges know their customers, the risk of money laundering is vastly reduced. This is because vigorous identity verification processes ensure that each customer is legitimate. This then significantly reduces fraudulent activity and improves market reputation.

Legal obligations in the crypto space are continually changing and evolving. Now, crypto businesses face greater regulatory challenges than ever before.

But, by implementing robust crypto KYC processes now, businesses can stay ahead of the curve. Instead of chasing after new regulations, they can focus on increasing conversion rates, streamlining transactions, and ensuring compliance as international guidelines evolve.

On top of this, by continually staying on top of regulatory changes, businesses can ensure they’re always compliant. In doing so, they can avoid the strict penalties that can be handed down by regulators.

The cryptocurrency market is notoriously volatile. However, much of this volatility is driven by instability and the suspicious nature of some anonymous transactions. By removing anonymity from the process, crypto KYC can bring stability to the market.

Here at Veriff, we make investing in crypto safe and easy. This is because our selfie-based crypto identity verification platform provides industry-leading conversion rates and high levels of fraud prevention.

Our purpose-built solution provides global compliance. With our help, you can satisfy FINRA, SEC, and GDPR requirements, as well as enforce AMLD6 guidelines. Plus, you can verify your customers in as little as six seconds and verify 95% of your customers on the first try.

Speak with the KYC compliance experts at Veriff

Our crypto KYC compliance experts are available to help you. If you’d like to learn more about how our crypto identity verification solution can help you meet your crypto KYC obligations, get in touch with the team today. We’d love to provide you with a personalized demo that shows exactly how we can help you meet your goals. 

Crypto KYC is the first step in the anti-money laundering (AML) due diligence process. When a financial institution such as a crypto exchange onboards a new customer, they must use KYC processes in order to identify and verify the customer’s identity. 

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A blog about crypto KYC and blockchain, including why crypto KYC processes need to be implemented and the benefits they provide. 

Crypto KYC and blockchain

An entity wanting to provide financial services, in addition to other regulatory requirements, needs to implement an AML and KYC program to protect itself against fraud and increase the level of security against funds being used for illicit activities. Of course, it is mandatory for financial service providers to comply with regulations, and they’re subjected to a range of different regulatory penalties if they fail to do so. That’s why it is essential to have a clear understanding of what anti-money laundering (AML) and know your customer (KYC) mean in real terms, and learn about the key differences between the two.

These terms are commonly used in the same context, but they mean different things. The significant difference between these two terms is that KYC is a specific process which takes place, upon fulfilling certain conditions (e.g. establishing business relationships, conducting an occasional transaction that exceeds certain amount, etc.), whereas AML is a entire set of procedures and processes aimed to combat money laundering and financing of terrorism, which can include KYC. This is the process of obtaining the information about the customer from a reliable and independent source, verifying it, and determining the risks from the establishment of a business relationship with said customer. The KYC process is used to ensure that entities obligated under the AML framework have sufficient knowledge about their customers and certainty about their identity. AML, on the contrary, can be described as an umbrella term for the entire set of regulated mechanisms and procedures that has to be implemented by a variety of financial actors to combat money laundering and financing of terrorism

In this article, we’ll tell you more about both AML and KYC programs, talk in-depth about the key differences, and explain the relevant processes, requirements, guidelines, and tools. 

AML refers to the activities that financial and credit institutions, and companies in other fields, such as gambling providers or lawyers providing specific services, perform to actively monitor clients and prevent financial crimes. The anti-money laundering process helps prevent a wide range of illicit activities such as money laundering or financing of terrorism. Companies, in any case, need to take these measures in order to avoid the potential aftermath of regulatory action taken against them.

The goal is to implement specific regulatory provisions to prevent illicit financial activities by addressing the risk factors inherent to the service, product, or the customer of the company. The AML framework consists of numerous elements - among these are risk assessment of clients, risk management systems, KYC (or customer due diligence) programs, and relevant reporting obligations. It is particularly important for the companies exposed to higher risks of financial crimes to implement an effective anti-money laundering compliance program to avoid facilitating monetary crimes and ensure regulatory compliance. The system should be comprehensive, detailed, regulation-specific, and well-planned. 

We can define KYC as the process of obtaining and verifying a customer’s identity against independent and reliable sources to protect an entity against various risks of financial crime. One of the steps of this process requires potential customers to provide credentials, such as identity documents, to prove that they are who they claim to be. For example, financial institutions may require individuals to verify themselves before opening an account to ascertain their identity. This allows companies to make sure that their services are used only for lawful purposes and to be able to assist relevant authorities throughout an investigation when any issues occur.

Besides preventing crime, KYC processes help banks and other financial service providers understand their customers, improve services, and effectively manage risks. Hence, it is vital for financial institutions to correctly implement such procedures to minimize the chances of aiding any unlawful financial activities. The financial institutions are encouraged to consult different stakeholders, both internal and external, to understand their specific regulatory obligations with regards to the KYC procedures. 

The main objective of the AML framework is to prevent criminals from easily accessing financial systems with the intention of laundering funds or conducting other financial crimes. The overall process aims to implement specific regulatory provisions to prevent illegal activities, mostly related to the financial system, and to avoid the usage of such a system for laundering funds. KYC, on the other hand, is one of the core elements of an AML framework as explained earlier. By obtaining the information about the customer as well as verifying their identity, it aims to prevent criminals from using a specific financial service for their unlawful activities. 

There are various components that help companies adjust their AML and KYC processes to suit their needs. An excessive library of regulations, opinions of supervisory authorities, and guidelines, have been issued by the financial supervisors to help companies to prevent financial crime. Let’s take a look at these components and talk about the major differences between AML and KYC systems in depth. 

In order to understand these processes, it is important to know about the risks associated with Money Laundering. This criminal activity can produce a massive negative impact on society, companies, and individuals. That’s why businesses worldwide must strive for compliance with money laundering prevention practices. 

AML practices put procedures and systems in place that prevent criminals from being able to easily access financial products and services. Upon correct implementation of such systems, it is almost impossible to hide the illicit origins of money within transactions. One of the most important components of the AML system is the KYC process. Companies are obligated to establish their customer’s identities and verify them before providing services or products. 

During client onboarding, AML-obligated companies need to identify and verify the information on their customers to complete the procedure. According to the regulations, companies must take extra steps when the relationship with a customer has numerous higher-risk factors, in order to prevent circumvention of money laundering systems. They should actively monitor their customers’ behaviour with regards to the usage of their services. However, in certain cases, publicly available information may also give grounds for suspicions, and institutions must report suspicious activities when they occur, in accordance with the relevant regulatory requirements. 

The KYC procedure is a mandatory step during this operation. It is essential to identify a client and verify their identity when providing services to them. This obligation helps companies fight fraud and avoid penalties from regulators. Businesses must ensure that they have a proper identity verification system set up, capable of verifying individuals using their ID documents and maintaining a track of high-risk customers to take actions when the need arises. 

Different countries have different AML and KYC regulations for banks, and other credit and financial institutions to be considered compliant. Generally though, these steps are quite similar to each other because they’re based on the same practices. Companies at risk of financial crime are required to implement an anti-money laundering program in order to avoid facilitating monetary crime and ensure compliance with the relevant regulations. The primary goal of these regulations is to detect, and respond to, the risks of money laundering and terrorism financing, thus preventing both.

On the other hand, we can describe KYC compliance as a regulatory obligation to develop customer identification processes, verify the information obtained about the customers on the basis of trust-worthy sources, as well as identifying and addressing the risks related to a particular product and customer. Consistent and effective application of the KYC procedures forms an integral part of the compliance with AML regulations.

There are several tools that help companies be compliant with AML and KYC regulations worldwide. For example, here at Veriff, we offer a full-stack AML and KYC solution. The core components are Identity Verification, checking PEP & Sanctions databases, considering adverse information & media, and ongoing monitoring. 

Using these tools you can ensure that your customers are who they say they are, and fight identity fraud effectively. Our verification engine makes automated decisions in a matter of seconds, which can help companies run their operations smoothly. Veriff also allows developers to deploy the end-to-end compliance technology with a single integration.

Cryptocurrency is a solution for many people worldwide to have cheaper and faster international transactions. Unfortunately, this is not the only reason why people are getting involved in the growing industry. The crypto sector has also enabled criminals to launder money and fund terrorists in an easier way by being a product that strongly favours anonymity. 

Regulatory bodies have been on a quest to address money laundering issues in the crypto industry that would help combat it, while not limiting the digital nature of the service. Previously, only crypto asset exchanges and custodian wallet providers have been subject to relevant anti money laundering regulations, yet in anticipation of upcoming EU-wide AML Regulations, more and more countries are subjecting all crypto-asset service providers to abide by  AML provisions.

Here at Veriff, we want to make it easy for companies to connect with honest people. Take a look at our full-stack AML & KYC Compliance solution that can help you fight financial crime effectively. It’s easy for developers to deploy Veriff’s end-to-end compliance technology with a single integration, backed by industry-leading support and account management. 

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Rising costs, lengthy onboarding processes, and poor conversion rates are all issues that can arise if KYC processes are not carried out efficiently. 

Thankfully, KYC issues can be simple to overcome when the right processes and structures are put in place. To help you learn more about how to overcome common KYC issues and challenges, we’ve put together this handy guide.

Putting proper KYC processes in place is essential if you’re looking to ensure compliance with anti-money laundering directives.

However, when they’re creating AML and KYC processes, many companies are wasting huge sums of money and countless man hours because their processes are ineffective.

Common challenges faced by firms include:

An inability to spot a change in circumstances

Wasting time and money on false positives

The easiest way to prevent any of these challenges arising is by using a class-leading AML and KYC compliance solution. By enlisting the help of a piece of software such as this, you can automate much of the process and save on man hours. Plus, you can also verify the identity of your customers in as little as six seconds.

By using a dedicated piece of software, not only can you overcome KYC issues, but you can also show regulators that you take financial crime and compliance seriously. On top of this, you can also ensure that you’re only ever asking your customers for the information you actually need, so the process won’t appear burdensome.

Due to the importance of AML policies, a number of AML fundamentals exist that businesses must follow regardless of the jurisdictions they operate in.

These fundamentals work as forms of best practice and should form the basis of a KYC compliance checklist that you follow on a daily basis. These fundamentals include:

As part of your CIP, you must identify your customers and their financial background. This process will also help you monitor their financial activities once they’ve opened an account.  

When onboarding your customers, you must ask them for several key pieces of personal information, including their full name, date of birth, and permanent address. The customer must also provide you with a copy of an identity document, so you can verify this information.

Once you’ve identified your customer, you must then calculate what level of risk this customer poses to your business. Depending on the customer, you can employ one of three levels of CDD. These are:

While customers who pose a low level of risk will be subjected to SDD as part of the onboarding process, those who pose a high level of risk (such as a politically exposed person) will be subjected to EDD processes.

Effective KYC processes don’t stop once a customer has successfully opened an account. Instead, you must monitor your customers on an ongoing basis. This will help you spot whether their risk level has changed or whether their activities are suspicious.

By continually screening your customers, you can keep an eye on their transactions and receive alerts if anything suspicious happens.

Although KYC issues can cause headaches for businesses, it is possible to overcome them with the correct planning and organization. Our top tips for overcoming KYC issues include:

AML regulations and KYC processes can be complex. Many of them also need to be followed to the letter. As a result, to make sure all staff members understand your processes and follow them correctly, you must put written policies in place. This way, all of your policies can be viewed by both staff members and regulators. Within your written policies, you should include information regarding:

What your identification processes include

What regulations you’re currently complying with and how you ensure compliance

Whether your policies have been independently audited

On top of this, you should also employ an experienced AML compliance officer who can guide your AML and KYC efforts.

A compliance officer should help you put your AML program in place, resolve KYC issues, and regularly review compliance.

Overall, the role of an AML compliance officer is to take ownership over the system and ensure that processes are followed and updated. They must also ensure that reports are filed, training is correct, and that the system is running smoothly.

As we mentioned earlier, the way you approach KYC and due diligence should reflect the level of risk that your firm faces. Due to this, you should employ a risk-based approach to customer due diligence (CDD) rather than making each customer face the same checks. This way, you can ensure that your approach to KYC and compliance is appropriate and proportional.

By employing a risk-based approach to CDD, you will receive a number of benefits. For example, you can make sure that you’re meeting your compliance obligations.

However, a risk-based approach to CDD will also help you overcome a number of KYC issues. For example, you can lower costs by only paying for the checks you need. You’ll also improve your conversion rates because customers won’t be subjected to onerous checks. 

Here at Veriff, our AML and KYC compliance solution can help you show regulators that you take financial crime and compliance seriously. It can also help you comply with regulations and fight financial crime.

If you’re interested in learning more about how you can meet your obligations while making the process as frictionless as possible for your customers, then talk to the KYC compliance experts at Veriff today. 

Putting proper KYC processes in place is essential if you’re looking to ensure compliance with anti-money laundering directives. However, when they’re creating AML and KYC processes, many companies are wasting huge sums of money and countless man hours because their processes are ineffective.

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Just as an employer must thoroughly vet a candidate, financial services businesses must also ask questions of prospective customers before they allow them to open an account. This helps mitigate fraud and lower money laundering risks. The process is known as customer due diligence (CDD) – and it should be an essential part of any anti-money laundering (AML) strategy. 

Customer due diligence involves taking steps to identify a customer and verify that they are who they claim to be. Typically, this means a business must gather essential information, such as the customer's name, residential address, and date of birth. The business then requests an official government document, like a driver´s licence, to confirm and validate the identity. Additionally, customer due diligence is about understanding the level of risk a potential customer poses and determining whether this risk aligns with the organization's risk appetite.

Customer due diligence is a foundation of know your customer (KYC) processes and AML strategies. CDD requires companies to understand who their customers are, their financial behavior, and what kind of money laundering or terrorism financing risk they present.

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