The increasing popularity of buying and trading cryptocurrencies worldwide has naturally caused a major growth in popularity of crypto exchanges. Binance, Kraken or eToro are names that ring a bell to anyone who decided to invest in crypto over the past few years. But, with the popularity of crypto trading, some questions started to arise. One of the major ones being: What about KYC for crypto exchanges?

What are crypto exchanges?

Crypto exchanges are digital marketplaces that make it possible to buy and sell crypto. Contrary to stock trading, you cannot buy cryptocurrencies through your bank or an investment firm. To get Ethereum, Bitcoin, or any other cryptocurrency available on the market, crypto exchanges are the place to look at.

Numbers of users and money involved in the cryptocurrency trading business are constantly growing. According to CoinGecko, The total crypto market has grown over 600% from $397 billion as of November 3, 2020, to $2.8 trillion on November 2, 2021.

At the same time, it is also estimated that in that same year, over 1.6 billion dollars worth of crypto was used to commit identity fraud, money laundering and other financial and cybercrimes.

What is KYC for Crypto Exchanges?

KYC stands for Know Your Customer. A KYC process  is considered an initial due diligence   stage of AML (anti-money laundering) procedures. When an institution onboards a new customer or a user, their identity is verified by the platform, in order to confirm their identity and assess risk value. 

What information is actually required from customers and the way the information is gathered, processed and verified, is often dictated by the regulations for specific industries. 

Proper KYC for cryptocurrency exchanges enhances safety for both parties involved – traders and trading platforms. It also ensures that the services are used accordingly and for legitimate reasons. Not only is it a foundation of compliance with regulations and laws, but it eliminates the risk of money laundering and other financial crimes committed through cryptocurrency trading. 

What are the main risks of the lack of proper KYC for crypto exchanges?

  • Increased risk of money laundering and terrorist financing through anonymous user accounts
  • The lack of monitoring and the control of transactions of users who are on watch lists or have previously been involved in financial crimes
  • Enabling identity theft crimes

Why is KYC for crypto exchanges beneficial?

To show why proper KYC procedures are beneficial for cryptocurrency exchanges and their users globally, it is good to take a look at other financial institutions and industries. Although the expectations regarding KYC for crypto exchanges can differ, the goal stays the same for everyone – ensuring the safety, transparency and fair trading of crypto assets and cryptocurrencies.

Building trust between customers 

It is one of the most important factors for KYC exchanges, especially on peer-to-peer crypto trading platforms, where users trade between each other. 

Risk assessment

KYC processes and proper identity verification of users enables exchange platforms to evaluate the risk level for each customer and recognize potential threats and oversee certain groups of customers more effectively.

Lower risk of fraud

Risk assessment of individual customers is one of the most important parts of bringing safety to any platform and its users. This way, cryptocurrency exchanges can recognise potential risks and threats early and implement proper policies in order to prevent fraud, scam and financial crimes attempts.

How can Fully-Verified help with the KYC for Crypto Exchanges? 

Fully-Verified offers a range of services that ensure compliance with the strictest regulations, safety and thorough identity verification and due diligence, such as:

Identity verification solutions:

  • Live-Verify. Video identity verification solution made in order to ensure the highest compliance and safety. The process consists of a live video interview with a highly trained operator who, with help of AI and machine learning solutions, verifies the identity of a user, confirms the authenticity of the presented identity document, as well as the rightful ownership. The full process is recorded and the video is available for viewing again. 
  • Self-Verify. Automated video identity verification solution which enables users to verify themselves without the operator present during the process. However, the whole process is still recorded and double-checked by a trained operator after the verification is completed.
  • Proof of Address
  • PEP and Sanctions Check

Manual KYC which means taking care of all your KYC needs after discussing your requirements and expectations with us

Growing expectations towards Crypto Exchanges – stricter regulations around the world

The research conducted at the end of 2020 by Cypher Trace, revealed that at that time, nearly 56% of cryptocurrency exchanges were not compliant with standard KYC regulations and requirements. 

According to the study, the vast majority of non-compliant crypto exchanges were located in Europe, US, Russia, and Singapore

Crypto equaling a complete lack of regulations and control is slowly becoming a thing of the past. Leaders around the world have recently started to introduce new laws and regulations, strictly directed at crypto exchanges and other crypto-related businesses, in order to close the door for those who used crypto trading for illicit purposes such as money laundering. 

For instance, China has now completely banned crypto trading. 

Canada classifies crypto-related firms as money service businesses and requires that they register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). In 2021, Canada has also increased its expectations towards crypto exchanges, which are now required to verify their users and comply with KYC regulations on the same basis as other financial institutions in the country.

In the UK, the exchanges are required to register with the Financial Conduct Authority (FCA). Moreover, the regulator has introduced a set of specific KYC/AML requirements that crypto exchanges are obliged to comply with. 

Europe – 6th Anti-Money Laundering Directive

The European Union has also taken an active stance against the lack of regulations of cryptocurrency exchanges in order to control the crypto exchange market more effectively. One of the biggest policies introduced by the regulator was the prohibition of anonymous cryptocurrency transactions. The exchanges are now required to enforce a proper KYC procedure in order to gather necessary information on its users. 

Moreover, the European Union has significantly increased criminal liability for cybercrimes and money-related crimes. This particular motion was directed at individuals, as well as corporations, including cryptocurrency exchanges. The penalties for the lack of compliance range from cease and desist warnings to significant fines, as well as four years of imprisonment. 

Related Post

Leave a Comment