What Is KYC in Crypto: Best Guide for Know Your Customer

Published: October 19, 2023 | Last Updated: August 22, 2023

Markos Koemtzopoulos

Markos Koemtzopoulos is the founder and main writer of ElementalCrypto. He has been a lecturer at the University of Nicosia on cryptocurrencies and DeFi and has taught two courses on crypto and blockchain technology.

KYC, which stands for Know Your Customer, is a crucial process in the world of cryptocurrency. It refers to the identification and verification procedures that individuals and businesses must undergo when engaging in crypto-related activities. The purpose of KYC is to prevent illicit activities such as money laundering, terrorist financing, and fraud, thereby promoting a safer and more secure environment for participants in the crypto industry.

Understanding the Basics of KYC in Cryptocurrency

KYC in cryptocurrency involves gathering personal information from users to verify their identity. This information typically includes details such as full name, date of birth, address, and sometimes even a scanned copy of an official identification document.

Crypto exchanges and other platforms require this information to comply with regulatory requirements and to mitigate the risk of illegal activities within their systems.

By implementing KYC procedures, cryptocurrency platforms establish a level of trust and legitimacy.

This allows them to operate within legal frameworks and gain the confidence of regulators, financial institutions, and investors. It also helps create a level playing field for compliance across the industry.

The Importance of KYC in the Crypto Industry

KYC plays a vital role in the crypto industry for several reasons.

Firstly, it helps to prevent money laundering and the financing of illegal activities. By verifying the identities of users and monitoring their transactions, KYC acts as a deterrent and barrier to those seeking to exploit cryptocurrencies for nefarious purposes. It also assists law enforcement agencies in tracking suspicious activity and identifying potential threats.

Secondly, KYC helps to safeguard the reputation and integrity of the crypto industry. By promoting transparency and accountability, it reassures users and investors that they are interacting with legitimate and regulated entities. This, in turn, fosters trust and encourages wider adoption of cryptocurrencies.

How KYC Affects Crypto Transactions

KYC requirements have a direct impact on crypto transactions, especially when it comes to buying, selling, or exchanging digital assets. When users want to participate in these activities, they are often required to complete the KYC process first. This means providing the requisite personal information and undergoing the necessary identity verification checks.

Once a user’s identity is verified, they can proceed with their desired transactions within the platform’s limits and policies. KYC helps ensure that funds are not being illicitly transferred or used for illegal purposes. While this may add an initial layer of friction to the onboarding process, it ultimately benefits users by creating a more secure and compliant environment.

The Role of KYC in Preventing Money Laundering and Fraud in Crypto

Money laundering and fraud are significant concerns in the crypto industry. Criminals may attempt to exploit the inherent features of cryptocurrencies to carry out illicit financial activities. KYC acts as a powerful deterrent and preventive measure against such activities.

By requiring individuals to submit personal information and undergo identity verification, KYC procedures help crypto platforms establish an auditable trail for transactions. This makes it easier to detect suspicious patterns of behavior, such as large and frequent transactions without a legitimate source of funds. Additionally, the cooperation between crypto platforms and authorities allows for real-time monitoring and reporting of potential money laundering and fraud cases.

Criticisms KYC in the Crypto Space

Critics argue that KYC may compromise user privacy and promote centralized control over decentralized technologies.

Crypto transactions are pseudonymous which means if someone ties your name to a public address they are able to see your whole transaction history. 

In the right hands, this can be great. For example, I just used Koinly to do my tax reports and by connecting all my Wallets to Koinly I was able to see all my transactions for the past year and the gains or losses I made. 

In the wrong hands, however, this information could be used for extortion or manipulation. Check out my article that explains what doxxing is for more about how things could go wrong. 

Also, KYC is completely against the original ethos of cryptocurrencies. For example, the whole point of Bitcoin is to get rid of central intermediaries such as the government. It gets kind of political and ideological from there on but the idea is money should be a fundamental right that no one has control over. No one should be able to print more of it and no one should be able to tell you what to do with it. 

Is there a way to avoid KYC? 

The most popular way to avoid KYC is to onboard via a platform that does not require KYC and buy some crypto. As crypto regulation increases across countries this is getting harder and harder to do. In the early days of crypto, there were peer-to-peer exchanges happening literally on the street.

Once you get your crypto most of the DeFi platforms such as Uniswap, Sushiswap, and the like do not require KYC as they are not centrally managed. However, it’s increasingly difficult to sell crypto for fiat currency without reporting it as the platforms that allow you off-ramp from DeFi platforms also require KYC.

The other alternative is to use mixers or tumblers. These bunch transactions from different users and mix them up so that it is hard to tell which belongs to who. But here too governments are cracking down. The most famous case is that of Tornado Cash and, more recently ChipMixer as these were being used by hackers to obfuscate the funds they had stolen.

Check out my article best-bitcoin-tumblers for more.

Step-by-Step Guide to Completing KYC for Crypto Exchanges

When signing up for a crypto exchange, users are typically guided through a step-by-step KYC process. While the specific steps may vary between platforms, the general process can be outlined as follows:

  • Step 1: Account Creation – Users provide basic information such as name, email address, and password to create an account on the exchange.
  • Step 2: Personal Information – Users are asked to provide additional personal details such as full name, date of birth, address, and sometimes nationality or tax identification number.
  • Step 3: Identification Verification – Users are required to upload scanned copies or clear photos of their identification documents, such as a passport or driver’s license. Some exchanges may also ask for a selfie or a photo of the user holding their identification document.
  • Step 4: in some countries, you may need to upload a utility bill to prove your address.
  • Step 5: Verification Review – The exchange’s verification team reviews the submitted documentation and compares it with the information provided. This review process can take several days, depending on the platform’s workload. Also, check how long does it take coinbase to verify your ID?
  • Step 6: Confirmation – Once the verification is complete, users receive confirmation of their KYC status and can proceed with their crypto transactions within the exchange’s limits.

Explaining Different Levels of KYC Verification in Crypto Platforms

Crypto platforms often implement different levels of KYC verification, depending on the features and services available to users. These levels are designed to accommodate various user needs while adhering to regulatory requirements:

Level 1: Basic Verification – At this level, users are required to provide basic personal information such as name, email address, and sometimes phone number. Basic verification is usually sufficient for limited services or transactions such as making purchases less than a $1,000 worth.

Level 2: Intermediate Verification – Intermediate verification entails providing additional information, such as date of birth and address, along with scanned identification documents. This level allows users to access more features and higher transaction limits.

Level 3: Advanced Verification – Advanced verification may involve enhanced due diligence, legal entity documentation, proof of source of funds, or additional compliance checks. This level is typically necessary for high-volume trading, institutional accounts, or access to specific crypto products or services.

Crypto platforms may provide further details about their verification levels and the associated benefits and requirements on their websites or support documentation.

Best Practices for Ensuring Smooth KYC Processes for Cryptocurrency Users

Completing the KYC process smoothly and efficiently can be crucial for cryptocurrency users to gain access to desired platforms and services. To ensure a seamless experience, consider the following best practices:

1. Prepare Documentation in Advance – Gather the necessary identification documents and proof of address before starting the KYC process. This helps to prevent delays and ensures that you have all the required information at hand.

2. Provide Accurate Information – Double-check the accuracy of the personal information you provide during the KYC process. Inaccurate or inconsistent information may result in rejections or additional verification requirements.

3. Follow Platform Instructions – Carefully read and follow the instructions provided by the platform throughout the KYC process. Each platform may have specific requirements or formats for document submissions, and adherence to these guidelines can prevent unnecessary delays.

4. Be Patient – KYC verification may take some time, especially during peak periods or when demand is high. Avoid submitting duplicate requests or repeatedly contacting customer support unless explicitly instructed to do so. Patience is key during the verification process.

Future Trends and Developments in KYC for the Crypto Industry

KYC in the crypto industry is an evolving area, driven by changing regulatory frameworks and industry dynamics. Several future trends and developments are worth noting:

  1. Enhanced Technology Solutions – Technological advancements, such as biometric identification, machine learning, and blockchain-based verification systems, are likely to revolutionize the KYC landscape. These solutions will further streamline the process, enhance security, and facilitate more efficient compliance.
  2. Global Regulatory Harmonization – As the cryptocurrency industry expands, efforts to harmonize KYC regulations across jurisdictions are likely to increase. This will help reduce regulatory fragmentation and provide greater clarity for industry participants. Already in the EU, a uniform regulation for crypto called Markets in Crypto Assets Regulation  (MiCa) rolled out in June 2023. MiCA will harmonize the current fragmented regulation across EU countries.
  3. Continuous Monitoring and Risk Assessment – KYC is becoming an ongoing process rather than a one-time event. Platforms are implementing continuous monitoring and risk assessment practices to identify and address suspicious activities in real-time.
  4. Collaborative Efforts – The crypto industry, regulators, and financial institutions are increasingly collaborating to combat illicit activities. By sharing information and expertise, they can collectively improve KYC practices and strengthen the overall integrity of the ecosystem.

In conclusion, KYC plays a pivotal role in the cryptocurrency industry by promoting transparency, preventing money laundering, and protecting user safety. By adhering to KYC requirements, individuals and businesses contribute to a more trustworthy and secure crypto environment. As the industry continues to evolve, it is essential for users and platforms alike to stay informed and adapt to emerging KYC trends and developments.

Other crypto concepts and terminology

FAQs

How long does KYC verification take?

Usually KYC verification is instant or automated. However if verification fails at the machine level it will have to be reviewed by a human. This can take up to two days. If your documentation is not in latin characters it can take even longer. For example my ID had Greek characters in the address and I had to reach out to support to get my proof of address recognized.

What are the disadvantages of KYC?

The main disadvantage is that you risk you data getting leaked and that people can see your entire transaction history. For this reason many idealists advocate against KYC in the crypto industry.

How much does crypto KYC cost?

From a customer perspective it costs nothing but some extra time to upload and verify your ID. From the company's perspective they usually outsource the process to a third company or software.

What does AML mean?

AML stands for anti money laundering and usually refers to regulation put in place to prevent money laundering from happening. KYC (Know you Customer)and AML processes usually go hand in hand.

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Markos Koemtzopoulos is the founder and main writer of ElementalCrypto. He has been a lecturer at the University of Nicosia on cryptocurrencies and DeFi and has taught two courses on crypto and blockchain technology.