Crypto assets have become the focus of policy makers, lawmakers, and financial regulators. To learn more about KYC in the crypto business, read this guide.
Everything you wanted to google about KYC in one article.
Virtual assets have become a visible part of the financial system over the last decade, with words like ‘Bitcoin’, ‘Ethereum’, and ‘crypto mining’ becoming household phrases among businesses and people all over the world.
Yet, as businesses come up with new ways to use virtual assets, money-launderers, terrorists, and other criminals have also turned to crypto. This has prompted governments to bring crypto service providers under the scope of Anti-Money Laundering (AML) regulations.
In line with such regulations, governments now require crypto businesses to implement Know Your Customer (KYC) procedures for their clients. This page summarizes all the details of this intricate process to help make sense of it all.
In many countries, crypto businesses need to comply with AML regulations. This means applying Customer Due Diligence (CDD) procedures which, among other things, include Know Your Customer (KYC) checks.
KYC checks aim to identify and verify clients before allowing them to make any transactions. The minimum information required during the onboarding process is:
The above information then gets compared to the government-issued documents submitted by the applicant.
Since crypto regulations vary drastically by jurisdiction, clients may have to submit other types of personal data. For instance, in the Guidance for the UK Financial Sector, the UK JMLSG indicates that the information collected as part of the KYC processes may include wallet addresses and transaction hashes.
During the onboarding process, KYC checks usually consist of the following steps:
To conduct KYC quickly and properly, crypto services often delegate this to specialized third-party solutions.
An example of automated KYC that’s completed in three stages within approximately 50 seconds.
The legal status of crypto businesses depends on existing AML guidelines and how countries implement them. Over the past several years, such guidelines have increasingly restricted crypto asset transactions, making KYC checks mandatory for a wider scope of operations. For example, in 2018, the European Union included crypto-fiat exchanges and wallet providers into the scope of its AML regulations (AMLD5), meaning they must comply with the same rules as financial institutions
Over time, it became clear that more services related to virtual assets needed to be regulated in order to effectively combat money laundering. Therefore, countries have begun implementing services specified in the FATF Guidance 2019 and its updated Guidance 2021. These include:
Sumsub has already written a series of detailed articles on national crypto regulations. Check out our guides to get an in-depth understanding of each jurisdiction:
Businesses that conduct KYC checks have a choice of manual and automated procedures. Both options are useful for companies, however manual checks come with more risks.
The implementation of manual KYC checks creates challenges both for businesses and clients.
Costly and slow process. If businesses employ manual KYC procedures, onboarding times likely take longer, resulting in a lower customer conversion rate.
Security risks. The manual approach leads to a higher error rate due to a human factor. In particular, a person verifying documents may not differentiate a forged document from an authentic one.
One possible solution for bringing down costs and speeding up onboarding is KYC automation. Unlike the manual approach, automation allows businesses to:
Automated KYC is performed by extracting data from provided documents, ensuring that all security features are present, and comparing the document itself to templates. Such an approach not only decreases the number of errors but also leads to a higher conversion rate thanks to a quick and simple onboarding process.
Countries will continue implementing new regulations and tightening existing ones. By ensuring AML compliance, crypto businesses can secure the trust of major players. Being fully compliant might take crypto businesses some time, but it most certainly will benefit them in the future.