Know Your Customer (KYC): Why do you need it?

Authorisation, attestation, verification and other identification procedures that precede a full presence on a cryptocurrency exchange can put many users off. KYC is particularly stressful when you have to post a scan of your passport and take a photo with it. Let's look at where these verification requirements came from and whether it's something to be wary of.

• KYC (Know Your Customer) is a legal practice that requires all financial institutions, including cryptocurrency exchanges, to identify and verify the identity of each customer before they can conduct financial transactions.
• Crypto-exchanges are free to determine their own verification steps, but typically user data such as name, date of birth, phone number, email address, country and address, and ID (passport driving licence etc.) is requested.
• There are several levels of identity verification in the crypto space - Basic (personal details), Intermediate (photos or scans of documents confirming your identity and residence address)

What is KYC?

KYC (Know Your Customer) requires all financial institutions, including cryptocurrency exchanges, to identify and verify the identity of each customer. This must be done before they can conduct financial transactions. This protects companies from the risk of working with fraudsters and terrorists and ensures the safety of customer assets. This was once just an internal policy of each company, but for about 5 years now KYC has established itself as a clear legal practice.

Crypto-exchanges are free to determine their own verification steps, but here's what user data is asked for without fail:

• NAME
• date of birth
• e-mail
• telephone number
• country and address
• ID (passport, driving licence etc.)

It is not enough just to give your details. Your phone number must be confirmed by a one-time SMS code, your passport details by a photo of your ID and a selfie with it, your residential address - e.g. with a utility bill.

And the more money you want to put into the exchange, the more information you may need. Typically, there is a basic KYC level that allows you to do all the basic transactions, and advanced levels that you need to pass if you want to put very, very large amounts of money on the exchange.

Types of verification

There are several levels of identity verification in the crypto space. The data you need to provide for verification depends on your legal status, the platform used and your purpose of use. In most cases, the data provided is processed automatically and already in case of any problems by the service's support team.

Conventionally, the verification process can be divided into:

 Basic, which may include providing personal details such as name, date of birth, phone number, email address.

The Intermediate one, where you may provide photos or scans of documents confirming your identity and residence address;

Comprehensive, which includes providing biometric data.

Many projects that raise funds and conduct pre-sales of tokens use third-party solutions to collect investor data. With the development of DeFi and the growing popularity of new models for fundraising, a significant number of platforms have emerged that provide data collection services. Such services include Fractal and Block Pass.

 The advantage of such services is the possibility of identity management. Users provide the necessary documents and pass biometric verification once, and then can choose which project or platform to provide access to personal information. KYC providers act as an intermediary between users and projects, taking care of user data security and ensuring all necessary AML procedures are followed.

 Unfortunately, some users believe that full verification is a violation of the principle of anonymity in blockchain technology. But, in fact, KYC is an indicator that a crypto-exchange is providing a safe space for all to conduct transactions.

AML - Anti-Money Laundering

Now let's deal with the next abbreviation. From the name in the title it is already clear that it is about anti-money laundering. AML became official after the creation of the Financial Action Task Force (FATF) back in 1989. And the full version of the name stands for Anti-Money Laundering, Countering the Financing of Terrorism and the Financing of Weapons of Mass Destruction.

Sounds cool, but what does this have to do with crypto-exchange? To clarify. Blockchain transparency is the ability for users to track the history of any cryptocurrency transaction. While this information is publicly available, it does not identify cryptocurrency wallet owners or the reason for transferring funds. And after all, any transaction could be linked to illegal activities such as terrorism, phishing or ransomware. Satoshi clearly developed Bitcoin for well-intentioned purposes only. But like many other cool developments, crypto is not immune from being used for criminal purposes. So when we buy crypto "off hand" we will never know if those hands were "clean".

And it is precisely in order to identify criminally derived funds that crypto exchanges implement AML (anti-money laundering) policies. It includes a broader set of measures than KYC:

In short, the crypto exchange does everything to make sure that not a single bit gets to us that has been stolen or used in criminal activity. I wouldn't want to buy such a bit. Would you?

Pros and cons of AML/KYC

How to register on a cryptocurrency exchange

Centralised cryptocurrency exchanges are one of the mainstays of the digital asset market in the world. In recent years, they have begun to comply with financial regulators' requirements for transparency in the crypto-sphere. Because of this, the process of registering an account on an exchange has become somewhat more complicated, with additional procedures for identity verification and so on. 

What do you need to register?

To register on a crypto exchange you need an email (email address), a mobile phone, documents to prove your identity and an opportunity to take selfies. Let's start with the first one - make sure you have an email with a strong password. It's best to have a separate email with all the necessary security measures for your account to register on cryptocurrency exchanges or other cryptocurrency-related platforms. 

 The second is your mobile phone number. Most platforms will redirect you to the KYC process as soon as you sign up, where you need to provide your mobile number. In addition, the exchange client needs a smartphone to connect the two-factor authentication of his account.

What is 2FA?

Two-factor authentication (2FA) is a method of user authentication that uses two different methods to verify their identity simultaneously when logging into an account. For example, in addition to the standard email and password, when you log into your account, an exchange will also ask you for a secret combination which is generated on your smartphone. 2FA refers to additional measures of cryptocurrency account protection, we will talk more about it at the end of the article.

Do you need a crypto wallet to sign up for an exchange?

 No, the exchange automatically generates wallets for every cryptocurrency available on it and will link them to your account. However, you will only be able to buy cryptocurrency with those wallets within the exchange.

How long will it take to register?

Registration on the exchange can be divided into three blocks - entering personal data into the registration forms, identity verification (KYC) and setting up additional account security measures. All that can be done in half an hour maximum, but approval of your KYC application could take up to several days. However, you can transfer a relatively small amount of common currency or cryptocurrency to your account and start exploring the exchange before the application is accepted.

How do I choose a crypto exchange?

The interface of the exchange is quite convenient and clear. Any user can immediately understand all the functions. Do not worry, if you do not understand something, you can always see the training and tips.

Reliability: This refers to the security of the exchange against hacker attacks and the reputation of its team. Google the platform's history and (if any) hacking incidents;

Liquidity: The higher the volume of transactions for different cryptocurrency pairs on the trading platform, the better. This means that you can easily find a buyer/seller for Bitcoin and altcoin without a dramatic change in their price;

Interface: A subjective point, but some, for example, may not like the design of popular exchanges. Visit the websites of different exchanges to evaluate them;

Outlook: Research the latest initiatives of trading platforms to innovate. If an exchange does not follow the latest trends, it is unlikely to stay relevant for long.

In general, the "safest" choice for a newcomer will be crypto exchanges at the top by popularity and trading volumes. Here you will find liquidity and reliability, and the major exchanges are unlikely to lose relevance in the near future.

Conclusion

Overall, there are many benefits for cryptocurrency exchanges to require KYC from their users. By understanding who their customers are and having them go through a verification process, exchanges can provide a safer and more reliable platform for everyone. Additionally, with the increasing regulation of cryptocurrencies, it is becoming more and more important for exchanges to comply with KYC requirements in order to avoid penalties. For users, going through KYC may seem like a hassle, but it is generally not too difficult as long as you have all the required documents ready. Following these steps will help ensure that you can smoothly pass KYC and start trading on your desired exchange.

Disclaimer:

Crypto trading entails a high level of risk and is not suited for all investors. You should carefully evaluate your investment objectives, degree of experience, and risk appetite before deciding to trade cryptocurrencies. You should not invest money that you cannot afford to lose because there is a chance that you will lose some or all of your initial investment.

You should be aware of all the dangers connected with cryptocurrency trading and seek counsel from a financial expert who is not affiliated with any cryptocurrency exchange. This website's opinions, news, research, analysis, pricing, and other information are offered as general market commentary and do not represent investment advice.