What is KYC Crypto? | A Complete Guide

Cryptocurrency is a market that is growing exponentially, thanks to the desire for consumers to invest their money in a decentralised platform that offers the potential for high returns on their investment. But, just like every new and emerging industry, crypto has seen a variety of new laws and legislation since its arrival, including AML regulations, leading many sector enthusiasts to wonder, ‘What is KYC crypto?’. 

Experts in everything AML, at SmartSearch, we offer a range of anti-money laundering services for cryptocurrency businesses to ensure that the digital industry is protected from financial crime and more. Keeping things as streamlined as possible for our customers, our platform offers seamless integration with your current digital solutions to improve your workflow effortlessly.

But, before you explore our platform, read on to learn about the importance of KYC in crypto and the advantages and potential disadvantages it offers to businesses. 

Explaining KYC Crypto

‘Know Your Customer’, or KYC, is a check used by businesses during the onboarding process to verify the identities of their customers. These checks are an essential part of the overall AML responsibilities of a business and help to protect the organisation against potential financial crime while also contributing to a healthy digital economy. 

The Key Steps Involved in the KYC Process

While the process and complexity of KYC may differ from one business to another, the general KYC procedure is as follows: 

• Customer Identification: Basic information is obtained from the customer, so that you can build a profile - this includes a full name, date of birth, contact details and a physical document against which these details can be cross-referenced. 

• Customer Verification: These identities and information are then authenticated against trusted independent sources, such as government databases. In the crypto industry, selfies taken by the customer, as well as other forms of biometric data, are commonly used during this stage.

• Risk Assessment: Once the customer has been verified, you will determine the level of risk they may present. You might conduct a PEP screening and sanctions search to evaluate their risk based on location, transaction history, and more.  

• Ongoing Monitoring: The status of a customer can quickly change, so the need for ongoing monitoring is crucial. Our ongoing monitoring and reporting solution alerts you to any behavioural changes using real-time alerts and notifications.  

Why Is KYC Important in Crypto?

The KYC process is just as important to crypto organisations as it is to any other business looking to safeguard their financial security. An essential part of the onboarding process, without a robust KYC solution, there is no way of knowing who you are allowing to freely use your platform, potentially enabling criminal activity and irreparably harming your business. 

KYC is mandatory on most regulated platforms and has the following roles in a healthy economic system: 

• Prevents Money Laundering: Identify users, evaluate their risk and monitor their future transactions, making it as hard as possible for criminals to take advantage of your platform. 

• Fulfil Your Legal Obligations: KYC isn’t an option for crypto businesses; it’s a legal obligation, so ensuring you have a comprehensive solution in place is crucial. 

• Develops Trust in the Cryptocurrency Industry: There remains doubt among the general population when it comes to cryptocurrency, but adopting a robust KYC solution demonstrates that AML and security responsibilities are being taken seriously. 

What Crypto Businesses Must Comply With KYC Regulations?  

KYC regulations are in place to help prevent businesses in the crypto sector from being vulnerable to financial crime; therefore, it’s a mandatory requirement for most companies. If you’re a business working in the cryptocurrency sector, you will need to provide proof of KYC activity if you are a:

• Centralised cryptocurrency exchange (such as Binance or Coinbase)
• Crypto payment provider or wallet (if you’re regulated)
• Initial Coin Offering (ICO) platform 

The Advantages and Disadvantages of KYC in Crypto

We’ve already established how a clear and concise AML procedure, which includes KYC practices, can help crypto businesses thrive and strengthen economic security. But, particularly in this sector, there can be disadvantages to this solution, with some customers actively seeking non-KYC crypto exchanges to try and get around features that should safeguard their identity. 

The Advantages of KYC 

The role of KYC in the cryptocurrency industry can be debated, but there’s no denying the benefits it offers, including: 

• The Prevention of Illegal Activities: Protecting your company and the wider industry from everything from money laundering to terrorist financing, verifying customers using KYC makes engaging in illicit activity harder for criminals.

• Improved Business Reputation: It’s a legal obligation to comply with KYC expectations, and doing so will improve your reputation and allow customers to build confidence in your brand.

• The Protection of Investors: As well as general customers, KYC can protect the identity and reputation of potential investors who approach and partner with you. 

The Disadvantages of KYC

Some businesses that operate in the crypto sector believe that KYC is damaging to the industry for the following reasons: 

• Global Limitations: Some countries across the globe are prevented from using platforms that use KYC procedures, thanks to strict sanctions that are in place. This closes off the crypto market and prevents some customers from interacting. 

• Privacy Concerns: The crypto industry is constantly vulnerable to hackers, and some customers don’t wish to upload comprehensive personal information. 

• Business Costs: KYC can be time-consuming and costly to implement, requiring both technical resources and staff training. These costs can add pressure on business operations and can sometimes lead to higher fees for customers. 

Make KYC Simple with SmartSearch 

Fulfilling your KYC responsibilities might sound like a complicated process, but, especially with SmartSearch, implementing a solution is effortless. Our complete process involves our Triple Check solution, which verifies customers using the Dow Jones Watchlist, carries out biometric facial recognition and finally provides a fraud risk score, making sure you’re comprehensively covered against financial criminals.   

Find out how our platform can transform your operations today by booking a demo or contact us to learn more about what we do!