If you are someone who has attempted to create an account or purchase cryptocurrencies from a centralized exchange, then chances are that you might have come across the term KYC.
This procedure is a commonly used standard in the investment industry to ensure that the brokerage can verify their client’s identity and also have knowledge of their investment and financial profile.
Today, we will explore more about know-your-customer (KYC) and why is it so important in the crypto business.
Without further ado, let us get right into it.
What Is Know-Your-Customer?
When a crypto exchange is onboarding a new customer, KYC is the first step undertaken by the platform to identify and verify the user’s personal information. This helps the exchange get a better understanding of their potential client’s investment activities and also check the legality of leveraging the services provided.
The know-your-customer procedure helps centralized crypto platforms combat money laundering and also prevent the financing of terrorist activities. In some countries, KYC is mandatory to ensure that the users are actually who they claim to be.
Why Does KYC Matter?
There are several reasons why KYC helps financial and crypto service providers.
- First and foremost, they help these platforms perform risk assessment by identifying the client’s financial history and assets owned
- It limits the probability of fraud committed by hiding real identity
- Determine the risk their potential customer may pose to illegal activities such as money laundering or terrorist financing
- Reduced chance of uncertainty allows crypto institutions to provide more services to legitimate customers and thereby increase their profits
How Is KYC Performed?
Virtual asset service providers like crypto exchanges often undertake a multi-step KYC procedure to prevent fraudulent activity on their respective platforms. The process can differ from country to country, but almost follow the same order:
- A new customer is required to submit their personally identifiable information, including their full name, date of birth, and address. These are to be submitted in electronic form either by scanning the document or uploading a digital version
- An agency authorized by the government of the user’s jurisdiction carries out the identity verification of the documents, such as a driver’s license, passport, or proof of residence
- Verify the customer’s identity against official databases that contain information about Politically Exposed Persons (PEP) and sanctioned individuals
If everything is clear, you are free to trade cryptocurrencies.
What Are The Benefits Of KYC In Crypto?
Despite the challenges of implementing state-approved KYC standards, crypto exchanges largely benefit from regulatory compliances for the following reasons:
- Verifying users’ identities improves transparency and increases trust among customers. Clients are far more likely to continue using a service if they are confident that the platform is taking proactive and preventive measures to protect their accounts
- Vigorous KYC procedures can significantly reduce fraudulent activity on crypto platforms and also improve their reputation in the market
- Robust KYC processes enable regulated crypto platforms to prevent or limit instances of customers using fake identities to create accounts. It also helps these businesses to reduce legal and regulatory risks and ensure compliance
- KYC programs contribute to the overall stability and value growth of the cryptocurrency market, which is known to be notoriously volatile due to suspicious and anonymous transactions
Can I Buy Crypto Without KYC?
Yes, it is possible to purchase cryptocurrencies without KYC requirements through blockchain-based P2P platforms like decentralized crypto exchanges (DEX) or crypto ATMs using cash or debit cards.
What are The Risks Associated With Buying Crypto Without KYC?
There are significant regulatory risks associated with buying cryptocurrencies without performing know-your-customer procedures. Regulators have penalized several centralized crypto exchanges for providing services to customers from sanctioned countries without conducting KYC.
Is It Safe To Purchase Crypto Without KYC?
When buying cryptocurrencies on DEXs, the token sellers are matched with buyers based on the order’s price and volume. These platforms receive their liquidity from the end user rather than from centralized liquidity providers.
Customers are also able to keep hold of their assets instead of having to trust a third-party custodian.
However, the caveat here is that decentralized crypto exchanges do not have to adhere to regulatory compliance, and their investors are offered no legal protection in the event they lose their crypto as there is no KYC involved to verify their usage by law.
Know-your-customer is a set of standards and requirements financial services like banks and crypto exchanges use to authenticate the identity of their customers. The procedure ensures that investment platforms are aware of their client’s risk tolerance and financial position.