What is KYC (Know Your Customer)?

words Al Woods

The Know Your Customer (KYC) procedure helps providers identify and verify their customers. This is done in the fight against money laundering/terrorist financing (AML/CFT), combatting financial crime, and ensuring customer integrity.

KYC actively fights criminal activity by collecting and verifying customer information. These reviews enhance the industry’s credibility and help financial service providers manage risk. On cryptocurrency exchanges, the practice of KYC has become commonplace. However, many criticize that it eliminates the main advantages of cryptocurrency – anonymity and decentralization. In the article, you can learn the kyc meaning and how to use it in practice.

KYC Know Your Customer

What does KYC mean?

KYC literally stands for Know Your Client (Know Your Customer regulations) and means specific customer verification rules that banks, exchanges, and other companies that work with private money use.

The essence of KYC comes down to three steps that you need to go through before conducting a financial transaction:

  • Client identification.
  • The essence of the operation and its risks.

The FCA is completed when the institution receives answers to these 3 questions. To do this, the client must provide a package of documents with certain information about himself.

What verification documents are needed?

The list of documents on KYC depends on the upcoming cooperation. An individual provides a passport and TIN to open a bank account. Other documents may be needed as the account activity progresses, for example:

  • certificate of employment, if a salary account is opened;
  • a contract to confirm the legitimacy of the received funds for a sole proprietorship.

KYC compliance is essential to reduce the risks of theft of critical data. Identity verification is the primary process that can help you to prove your identity.

Passing rules

A client wishing to receive the services of a financial institution fills out an application form, which usually includes questions related to the CAS. But they can be contained in a separate questionnaire. Further, the company processes this information and confirms or refuses cooperation.

Why is KYC required?

First of all, KYC aims to protect financial institutions from illegal and fraudulent use of their services. In particular, money laundering and terrorist financing.

It provides sufficient information about the client to decide objectively about smooth cooperation with him. There are:

  • Identify the counterparty and understand the essence of its activities.
  • Determine how exactly he will cooperate with the financial institution and with what tools.
  • Security Service – to determine the degree of risk of the client’s involvement in illegal activities.
  • Determine the type and number of transactions for a particular client.
  • Track unusual client transactions.
  • Ensure compliance with state authorities’ compliance requirements in combating money laundering and terrorist financing.

From these components, the CUS forms a portrait of the client, and this portrait is not static – it is constantly supplemented with data as the cooperation and activities of the client develop.

What is the benefit for customers?

KYC, for the client, is an identifier for setting up relationships with a financial institution. For example, it improves the accuracy and usefulness of the services provided:

  • the bank manager will be able to choose and offer the optimal package of services according to the tasks (assets protection, business support, etc.);
  • stock exchange broker will be able to give more helpful investment advice, taking into account the actual financial situation of the client;
  • financial consultants will find the best solution for reputation management.

In the world, KYC is a common practice for financial institutions, accounting, legal, and betting shops. With its help, financial market participants counteract fraud, theft, money laundering, and financing of illegal operations.

How widespread is the technology?

Due to the anonymous nature of cryptocurrency, criminals use it to launder illicit funds and evade taxes. Better regulation of the cryptocurrency industry positively affects its reputation and ensures that all taxes are paid. There are three main reasons why KYC practices are essential in the cryptocurrency industry:

  • Transactions on the Blockchain are irreversible. If you make a mistake in a transaction, no one can cancel it and return your money to you. This means that attackers can steal or move funds without the possibility of return.
  • Cryptocurrency provides anonymity (users use pseudonyms). You do not need to provide personal data to open a cryptocurrency wallet.
  • Taxation and legislation regarding cryptocurrencies in many countries are still unclear.

Although KYC takes much time to create an account, the benefits of this practice cannot be overestimated. It may not be evident to the average customer, but KYC helps secure funds and fight crime.

Key Benefits of KYC

Only some of the benefits of KYC are apparent. This practice helps not only to resist fraud but also to improve the financial system as a whole:

  • Lenders can more easily assess their risks by knowing the identity and financial history of the client. KYC promotes more responsible lending and risk management.
  • KYC aims to combat identity theft and other types of financial fraud. There is ongoing monitoring in a real-time format.
  • KYC acts as a preventive measure against money laundering.
  • KYC increases customer confidence in financial service providers and helps monitor these services’ security and accountability. The reputation of services directly impacts the financial industry as a whole and can stimulate investment.

As you can see, the technology is widely popular. It opens up vast opportunities for users, reduces the risks of manipulation and theft of funds, and allows you to identify specific customers uniquely. Financial crime prevention is one of the main options of KYC.

The KYC procedure has several apparent advantages but still causes some controversy. Many people oppose KYC customer due diligence to the traditionally anonymous nature of cryptocurrencies. As a rule, most criticism is based on privacy and commission issues, which should be considered beforehand when choosing.

Final Thoughts

Cryptocurrencies have been focused on decentralization and freedom from intermediaries from the very beginning. As we have already said, any user can create a wallet and store cryptocurrency without providing information about himself. However, for these reasons, cryptocurrency has become actively used for money laundering.

Governments and regulatory frameworks require all exchanges to perform KYC checks for their clients. Making KYC procedures mandatory for cryptocurrency wallets is challenging, so fiat-to-crypto exchange services are better suited for implementing KYC. Some investors use cryptocurrencies for speculation, while others appreciate their features and benefits.

KYC processes are the industry standard for financial services and cryptocurrency exchanges. This practice is one of the most important measures to combat money laundering and other crimes. No one likes to go through KYC checks, but they are essential as they help to ensure security. As part of enhanced anti-money laundering measures, passing KYC verification allows you to trade cryptocurrency on cryptocurrency exchanges with complete confidence in the safety of funds.


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