KYC compliance is an integral component of AML/CFT laws for exchanges. Without appropriate ID verification processes in place, exchanges could face fines or regulatory actions from government authorities.
KYC can help crypto exchanges bolster their reputation and establish customer trust. Customers may continue using an exchange if they know authorities can easily spot criminals within its ranks.
What is KYC?
KYC refers to a series of procedures used by cryptocurrency exchanges during onboarding to verify customer identities and assess risk. KYC helps cryptocurrency exchanges comply with anti-money laundering (AML) laws while also helping prevent misuse of digital currencies.
Furthermore, they provide protection from fraud and can restore stolen assets. Modern criminals are adept at using every tactic possible to trick their victims into divulging personal data, from sending emails posing as legitimate government agencies or making phone calls with fake calls from the IRS claiming back taxes have to be paid off.
To comply with KYC requirements, businesses should implement a digital ID system like GetID that uses biometric facial recognition and liveness detection technology to authenticate users. By using this technology, companies can speed up onboarding processes, detect document fraud (like edited photos or altered text) more quickly, perform ongoing risk analysis as well as continuously evaluate financial and reputational risks over time; ultimately helping maintain compliance, reduce financial and reputational risks, build customer trust and loyalty more easily and strengthen compliance efforts overall.
Why do exchanges need to do KYC?
Know Your Customer (KYC) compliance is mandated by law for banks, lenders, insurance providers and all financial and monetary institutions of any size – this applies equally to cryptocurrency exchanges.
KYC (Know Your Customer) checks are an integral component of the identity verification process required of cryptocurrency exchanges to comply with anti-money laundering (AML) laws and regulations.
As part of their onboarding process, cryptocurrency exchanges must confirm a client’s identity by gathering their name, date of birth, address and government-issued ID card information. KYC processes may also require additional documentation or due diligence depending on their level of risk.
Cybercrime has seen unprecedented growth over the years, reaching alarming global levels. Implementing effective KYC procedures helps stem this rising pandemic; for example, fraudsters often use fraudulent emails and telephone calls impersonating legitimate companies such as Apple to collect personal information through phishing scams. By adopting digital ID systems like GetID crypto exchanges can ensure their users are genuine individuals protected against criminal activities.
Do exchanges need to do KYC on their wallets?
cryptocurrency transactions leave a digital trail, so exchanges should implement KYC/ID verification procedures that reduce legal and regulatory risks, so they can focus on improving conversion rates and expediting transactions.
KYC protects users’ assets. Should an account become compromised, an exchange can trace its activities back to an intruder and recover customer funds – this ensures cryptocurrency investments do not serve as the means for money laundering or criminal activities.
Crypto exchanges operating within the US are considered money service businesses and must abide by KYC/AML regulations. To meet these needs, many choose a Digital ID solution which uses facial recognition technology with liveness detection (blinks, eyebrow movement or head turn) to verify user identity. Such solutions also help expedite KYC processes faster by requiring less documentation – saving both time and money!
Do wallets need to do KYC?
KYC verification may reduce fraud and protect customer assets, yet it also creates user onboarding friction. Users often experience lengthy wait-times for manual verification, leading to lost interest in an exchange that forces them to wait – something which can eventually lead to churn and reduced loyalty over time. Furthermore, KYC requires sharing sensitive personal data with third-party verifiers which exposes users to hacking risks.
Some centralized exchanges don’t require KYC for fiat-to-crypto trading, making these options accessible via crypto ATMs or decentralized exchanges (DEXs) on blockchain-based P2P marketplaces such as PancakeSwap, Unswap V3 and dYdX Exchange.
However, all crypto exchanges should implement KYC to comply with FATF guidance and avoid money laundering and terrorist financing. This includes creating an efficient identity verification process using facial recognition technology for faster and more secure identification purposes.