The cryptocurrency industry continues to boom, and its ecosystem continues to be even more populated. The crypto market is rising, and blockchain cryptocurrency platforms such as Bitcoin and Solana remain attractive investment opportunities; other cryptocurrency platforms and fiat coins are on the rise as well.
Cryptocurrencies started as just a trend or a strange tender; however, despite the misconceptions and the crackdowns by several governments in the early 2020s, for example, the Chinese government, cryptocurrencies have managed to remain and grow. While individuals and governments continue to be wary of cryptocurrencies, some governments have begun to build legislative and regulative frameworks for cryptocurrencies (KYC) as the cryptocurrency market continues to be resilient and grow. Perhaps it is much more rational to regulate stringently than clamp down; clamping down can provide more opportunities for more illicit activities done beyond the government's privy.
In the early days of cryptocurrency, KYC was almost non-existent. Many crypto exchanges operated without using identity verification processes, allowing users to trade, buy, and sell cryptocurrencies anonymously. This lack of oversight led to the widespread use of cryptocurrencies for illicit activities, drawing the attention of regulators.
While KYC crypto requirements are gradually evolving around the world and may be quite tricky to grasp, crypto transactions and platforms are increasingly being bound by KYC regulations. Reading further will expose you to a basic and adequate understanding of KYC requirements for cryptocurrencies.
What Are Cryptocurrencies and Crypto Exchanges?
Cryptocurrencies are digital currencies that make use of cryptography for security and operate on a decentralized network based on blockchain technology. They are not like traditional currencies that governments and central banks issue; no single entity controls cryptocurrencies. Rather, they depend on or use a distributed ledger system that records all transactions across a network of computers. Examples of cryptocurrencies are Bitcoin, Dogecoin, etc.
Crypto exchanges, on the other hand, of course, have to do with cryptocurrencies. Crypto exchanges are digital or online platforms on which users can sell, buy, and trade cryptocurrencies. There are two main types of crypto exchanges:
1. Centralized Exchanges (CEX)
These exchanges are managed by a central authority or company. They offer a user-friendly experience and often provide additional services like fiat-to-crypto trading, high liquidity, and customer support. However, users need to trust the exchange with their funds and personal information.
2. Decentralized Exchanges (DEX)
These exchanges operate without a central authority and use smart contracts to facilitate trades directly between users. DEXs typically offer more privacy and control over funds but may have lower liquidity and higher complexity compared to centralized exchanges. Examples of crypto exchanges include Coinbase, Kraken, Binance, and Kucoin.
What Is KYC?
Know Your Customer (KYC) is a requirement by regulation mandating financial institutions and businesses to confirm or verify the identity of their customers.
The primary purpose of KYC is to prevent illegal activities such as money laundering, fraud, and terrorism financing by ensuring that only legitimate individuals and entities engage in financial transactions.
The Importance of KYC in Crypto: Why Does Crypto Need KYC?
Why is KYC important in crypto? Know Your Customer, a compliance measure initiated to prevent illicit activities such as identity fraud and money laundering is important for the crypto industry for the following reasons;
1. Regulatory Compliance
Governments worldwide are beginning to develop important and stringent regulations for cryptocurrencies that are highly needed; they an not be left unchecked. KYC makes sure that crypto platforms comply with local laws and regulations. That involves data collection, protection, and the like.
2. Anti-Money Laundering (AML)
KYC helps the prevention of money laundering by identifying and monitoring suspicious activities. By knowing who is using their platform, exchanges can detect and report illegal activities and adhere to AML regulations.
3. Customer Protection
KYC processes in crypto can help protect users from fraud and other financial crimes by ensuring that only verified individuals are able to access the platform, rather than unverified users with malicious purposes.
4. Building Trust
Implementing KYC in crypto builds trust with government and industry regulators, customers, and the broader financial system; this makes it easier for cryptocurrencies to gain mainstream acceptance in the industry as a trustworthy brand or business to patronize or align with.
5. KYC Aids a Safe and Organised Onboarding System
Know Your Customer (KYC) is an important process that allows financial institutions and other regulated entities to confirm or verify the identity of their customers and assess their risk profiles. KYC in crypto plays a vital role in ensuring a safe and organized process.
These are five ways in which KYC aids a safe and organized onboarding system by facilitating identity verification with accepted or government-issued documents such as passports or driver's licenses. The documents required for KYC can be found here.
A well-organised KYC process can improve customer experience by simplifying the onboarding journey. Automated KYC solutions and digital onboarding platforms can provide a seamless and efficient experience, reducing the time and effort required to complete the onboarding process.
Read More: KYC in Crypto: Does it Really Matter?
The Standard KYC Requirements for Crypto: What are the Requirements for KYC in Crypto?
KYC Requirements for Crypto.
The standard KYC process in the cryptocurrency industry usually involves well-curated steps, data collection, and identity confirmation. Crypto exchanges now implement KYC in their onboarding possess. Crypto exchanges like Binance implement KYC in their onboarding process. Although not all crypto transactions may involve KYC, like buying, an individual may not need to go through KYC to buy cryptocurencies, depending on the platforms being used.
Centralized crypto exchanges like Binance mandate KYC for their users; decentralized crypto exchanges may not require KYC, as they operate on a peer-to-peer basis.
Standard KYC requirements for crypto exchanges will typically include;
1. Collection of Personal Information
Users must provide basic personal details like complete government name, address, date of birth, and nationality. This can help create a rather robust proof of legal identity.
2. Identity Verification
Users are required to submit government-issued identification documents, including a passport, driver's license, or national ID card. Some platforms may also require users to take a selfie while holding the ID for additional verification.
3. Proof of Address
Users may need to submit a recent utility bill, bank statement, or other documents that confirm their residential address. This can be verified manually or with the help of digital address verification solutions.
4. Financial Information
Crypto exchanges can also request information about a user's source of funds or financial status, especially for larger transactions or higher account tiers. This is the mandate of the “Travel Rule”.
5. Ongoing Monitoring
KYC is a continuous process, not a one-time event. Crypto platforms will typically continue to monitor user activities to detect suspicious behaviors that could indicate money laundering or other illicit activities.
Evolving KYC Regulations For Crypto
KYC regulations are evolving and taking shape; here is an overview of KYC regulations in select jurisdictions.
1. United States KYC Regulation for Crypto
The Financial Crimes Enforcement Network (FinCEN) began enforcing stricter KYC and Anti-Money Laundering (AML) regulations on crypto exchanges in 2014. The regulatory body required them to register as Money Services Businesses (MSBs) in order to comply with the stringent AML rules Money Services Businesses. All MSBs are required to register with the federal government's Department of the Treasury.
Within six months of starting operations in the United States, a new Money Services Business (MSB) must complete and file FinCEN Form 107 (Registration of Money Services Business). This form must be refiled every two years, and a copy of the registration form, along with any supporting documentation, must be kept at a location within the US for at least five years. MSBS is also subjected to a host of other stringent record-keeping, transaction monitoring, and reporting rules.
2. European Union
The EU's 5th Anti-Money Laundering Directive (5AMLD), implemented in 2020, extended AML and KYC requirements to cryptocurrency platforms. It made it mandatory for exchanges and wallet providers to verify their customers' identities and report suspicious transactions.
3. Japan
Japan is one of the earliest adopters of cryptocurrency regulation, requires exchanges to register with the Financial Services Agency (FSA) and implement strict KYC measures to ensure customer identities are verified.
4. Canada
In Canada, the main regulatory body overseeing cryptocurrency activities is the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
In 2020, Canada also implemented amendments to its Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), which brought cryptocurrency exchanges and payment processors under the category of regulated entities. These amendments require that crypto businesses register with FINTRAC, implement robust KYC processes, and report large or suspicious transactions. Canadian crypto platforms are required to collect and verify customer information, including personal identification documents and proof of address.
The regulations also impose thresholds for reporting transactions, such as the CAD 10,000 reporting requirement for large cash or cryptocurrency transactions. Additionally, platforms must maintain records of customer information and transaction history for at least five years.
5. Kenya
The Central Bank of Kenya, CBK, released warnings about the risks associated with cryptocurrencies, emphasizing that they are not legal tender, and cautioned the public against using them. Despite this warning, cryptocurrency usage in Kenya has been on the rise, particularly for remittances and peer-to-peer transactions, driven by the country's robust mobile money ecosystem.
While Kenya has not established comprehensive regulations specifically targeting cryptocurrencies, the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA) have guidelines that require financial institutions to implement KYC measures. In practice, many Kenyan crypto platforms and peer-to-peer exchanges voluntarily adopt KYC processes to build trust with users and comply with general financial regulations. These KYC measures often involve identity verification and monitoring of transactions to detect potential illicit activities.
6. The Travel Rule
The Financial Action Task Force (FATF) officially implemented the "Travel Rule" in 2019 as an amendment to Recommendation 16. Originally set for traditional financial institutions, the travel rule mandates that when a financial institution facilitates a transfer of funds above a marked amount, it must share specific information about the sender and receiver of those funds with the recipient institution. However, the FATF has also incorporated virtual assets that are mandated by the Travel Rule.
The cryptocurrency market is borderless by nature; therefore, there has been a push toward standardizing KYC regulations across borders. Oversight bodies like the Financial Action Task Force (FATF) issued guidelines to member countries, recommending that crypto platforms be subject to the same KYC and AML requirements as traditional financial institutions.
The FATF's "Travel Rule," which requires exchanges to share information about the originators and beneficiaries of transactions above a certain threshold, is a groundbreaking development in the global regulatory landscape. While implementation varies by country, the Travel Rule represents a move towards greater international cooperation and standardization of KYC regulations in the crypto industry.
Despite the progress made, implementing KYC regulations in the crypto space remains challenging. Decentralized exchanges (DEXs), privacy coins, and other innovations within the industry pose significant obstacles to traditional KYC enforcement. Regulators are still trying to effectively regulate these aspects without limiting or discouraging digital innovation.
FAQs on KYC in Crypto
1. Do all Crypto Wallets Require KYC?
Not all crypto wallets require KYC. Custodial wallets, offered by exchanges, often mandate KYC, while non-custodial wallets provide full control over assets without requiring personal information.
2. What crypto does not need KYC?
Mergex crypto does not require KYC. It offers traders the benefits of high leverage, advanced security, and a user-friendly platform.
3. Do I need to complete KYC to buy cryptocurrency?
If you're using a KYC-required exchange, verification is essential for trading. Non-KYC exchanges might offer more privacy but they come with increased risk of frauds and scams.
4. What are the KYC requirements for cryptocurrency?
The requirements for crypto include a collection of personal information. Identity verification, proof of address, financial information, and ongoing monitoring.
5. Does Binance require KYC?
Yes, binance requires KYC for all its users in the United States. KYC is mandatory for all US-based Binance users, regardless of their account type or participation in programs like Binance Link.
How to Achieve KYC Compliance in Crypto Using Youverify's KYC Solution
Crypto exchanges and other related platforms have become increasingly KYC compliant owing to the major clampdowns and introduction of legislation and regulations in different jurisdictions.
Artificial intelligence compliance software is a major efficient tool that is being used to achieve prime and seamless compliance. Youverify offers a suite of KYC AI-powered software for all crypto exchanges. Join over 100+ established and emerging crypto platforms all over the world to achieve KYC compliance in crypto using Youverify’s KYC solution. Request for a FREE DEMO today with our KYC compliance expert