KYC or 'Know your Customer' is a term used within the financial industry and Cryptocurrency by way of describing a practice implemented to an account or person. It is to determine people who they say they are. Anyone who has signed up to any centralised cryptocurrency exchange, will know all too well about this requirement. When KYC protocols were first introduced some 20 years ago to financial institutions in the US, there wasn’t much resistance. As a result, today, it is a globally recognised service within Fintech ‘Financial Technology’ services.
The key element to KYC is the need to submit a comprehensive amount of personal information. 20 years ago, when first introduced, the fear around data protection was less than what we see today. Fast forward 20 years, the very thought of openly giving personal information rightly scares the public. Couple this with the perception of anonymity afforded to the cryptocurrency space, you can see where the newfound objection has emerged from.
Despite this fear, the benefits of KYC are surely worth pursuing. Protection of users’ accounts and combatting money laundering are merely added insurance for the vast monies seen within the blockchain in 2021
How Does KYC Work?
Typically, when you sign up for an exchange, it will ask for simple information such as name, date of birth, and email address. A KYC protocol adds another layer of security by having you provide additional details. This step can vary depending on the platform and the country you live in.
In most cases, you’d be asked to give a national identification number on top of your name and address. Many nationalities must submit an equivalent of the SSN ‘Social Security Number’, often their passport number, national ID number, or driving license.
In most cases, you must send a photo of it. This is to demonstrate that SSN or national ID belongs to you. Several platforms even need a photo of you holding it and some need to see the front and back of your ID. The larger the exchange, the more complex the process.
Following on from proving individual identity, in some cases, proof of address will be required. This could be by way of a utility bill dated within a certain time period.
Depending on the exchange, the verification period can take some time. Some exchanges can be completed within minutes. However, depending on the exchange, you may get limited access to services you may take advantage of. Most will not allow for withdrawals until KYC is completed.
Why is KYC Important?
The process of KYC is essentially one to ensure compliance to AML ‘anti-money laundering’ and ‘anti- bribery standards’ which was initially committed to in 1989. Compliance to KYC is required by law for financial and monetary institutions. As a consequence of cryptocurrency existing in a ‘grey area’, not all exchanges are required to implement KYC, with the exception of fiat-crypto platforms.
Because of this ‘grey area’ many exchanges are still yet to implement KYC protocols.
The benefit of having a KYC protocol allows for exchanges/businesses to monitor transactions and maintain a clear understanding of the users, how they are using the exchange and more importantly, reject applications with dubious or disputed history. Risk can be mitigated by employing this procedure.
In simple terms, knowing that any malicious or questionable actions can be traced back to an individual as a result of KYC serves to discourage at source.
The importance of KYC is clear to see, but implementation of this protocol does not guarantee safety within cryptocurrency. What is does show is that an exchange or business demonstrates a focus on ensuring integrity of a user and/or business.
By conducting KYC for a platform, a user agrees to vacate anonymity which is why many users and projects continue to use decentralised platforms such as Uniswap and Pancakeswap.
KYC is focused on compliance and mitigating risk, not isolating an individual choice. With that, choosing the correct platform will inevitably be an individuals or business decision based on their own expectations
Verify continues to advocate that research is key. Several factors will influence choice, but research is paramount and KYC is just one element to consider.
