Modern finance is becoming safer and more accessible for the modern investor. A promising solution is the combination of decentralised technology and a 'know your customer' policy.
Compared to cash, cryptocurrency is in less demand among those who make money dishonestly - 4% versus 1%. By keeping the private data of digital asset owners secure, blockchain simultaneously allows financial regulators to gather enough information to combat shady schemes.
Financial market regulators - the G-20 Financial Stability Board, IMF, US Securities Council and others - have developed a list of measures to counter criminals in money laundering. At the heart of the countermeasures is the requirement by regulators that financial institutions and individuals comply with KYC/AML policies.
Through KYC or "Know Your Customer", financial institutions must deny access to money transactions to individuals who are suspicious or who have been banned from doing so by a court order or for other reasons. The KYC process includes:
- Obtaining the user's identity and verification to access the financial institution's services
- Checking whether the user is involved in illegal activities
- Verification of origin of funds for both the user and the recipient of the payment
- Evaluating large wire transfers and checking suspicious transactions
The financial institution is required to submit these KYC procedures to law enforcement agencies in its jurisdiction.
The purpose of the AML procedure is to discourage the transfer of "criminal" money into "clean" assets. The AML procedure verifies:
- The movement of counterparties' funds within and outside the country
- Data on counterparties obtained through KYC procedures
- Data on certain types of transactions
The developers of KYC and AML envisage that the procedures will help to identify the flow of criminal money, remove it from circulation and stop the financing of criminal activities.
The US has required the implementation of KYC/AML procedures in legislation for cryptocurrency market participants. As of January 2020, there is an AMLD5 directive in the EU, which requires all participants in the digital currency market to be recognised as financial institutions and to comply with KYC/AML procedures.
Users of cryptocurrency exchanges from the EU and the US can now only trade cryptocurrencies after verifying their identity.
The standard verification procedure under KYC policy includes:
Providing passport details indicating residence registration, which requires sending a scan of a passport or other document to the cryptocurrency exchange administrator to verify the user's identity. Along with the scan you are required to send a selfie with this document, thus the exchange receives a confirmation that the document was issued to the user and not to another person;
In some cases: confirm the address of residence by sending a scan of the utility bill, certificate of registration, or other documents with the address, name and surname of the user;
If you use a bank card for bank transactions, it is mandatory to send a scan or a self-photo of the card. The name on the card must be the same as the identity document.
Mandatory compliance with regulators' requirements leads to the fact that cryptocurrency exchanges have quite a lot of information about users' transactions. However, clients of bona fide exchanges may only face difficulties if they are in breach of the law.
Some platforms abuse KYC/AML procedures by freezing user funds under the pretext of incomplete information about the origin of the money. In this case, customers have the right to recover their funds in court, which would not be possible without identification. Recommendation: Research the platforms thoroughly before using them.
KYC/AML does not contradict the basic idea of cryptocurrency - user anonymity and free movement of finances. Mandatory verification gives customers of cryptocurrency exchanges and investment platforms several advantages:
- working with companies approved by government regulators;
- the certainty that assets purchased are not blacklisted;
- ease of recovery of access to their accounts.
KYC/AML does not apply to the entire industry - users are free to move their cryptocurrency funds outside of exchanges as long as it does not contradict local laws. In this way, Know Your Customer is an organic addition to the broader blockchain industry, which encourages its development.
KYC/AML procedures work well in conventional financial markets, and in the digital currency market, their effectiveness is undeniable. The cryptocurrency market has no boundaries, unlike conventional financial services markets. The Southeast Asian digital asset exchange can be traded by traders from around the world, all of whom are bona fide users vetted by government regulators and company security services.
US and EU financial regulators explain the introduction of KYC/AML procedures and mandatory user verification by the need to boost trust in cryptocurrencies. Regulators' representatives argue - mandatory user verification will help avoid theft of funds from user accounts, stop fraudulent transactions promptly and put user interests at the centre of the new financial services industry, the cryptocurrency market, with minimal, in regulators' opinion, costs for the user himself - to put basic personal data under control of financial institutions.
Digital currency players believe - KYC/AML procedures will support the new cryptocurrency market by creating a flexible regulated space that everyone can join.
Mandatory user verification is a tool that will allow cryptocurrency exchanges to stay within the legal framework while maintaining flexibility and efficiency.
Some exchanges require mandatory verification only when withdrawing large amounts of cryptocurrency from the site. This is understandable due to the convenience of the service - owners of small amounts are less likely to fall victim to fraudsters. However, they are also advised to go through the procedure to get extra protection.
Legislation in North America and Europe in most cases requires mandatory verification of users of cryptocurrency trading platforms.
Cryptocurrency trading platform Broex values the security of its customers and follows legal standards, and reminds of the need for mandatory verification before using its services. The Broex team believes that the goal of the cryptocurrency industry becoming an alternative to the current financial system is achievable with the introduction of high-security standards and clear rules for market participants that take into account the needs of all parties.