What is KYC? How does it work?

Last Updated on August 20, 2022 by aicrypto

KYC means Know Your Customer. Providers of cryptocurrencies must implement a KYC procedure to be able to ensure that customers do not violate money laundering laws.

In the crypto world, regulations continue to advance. Meanwhile, more and more crypto exchanges have to offer so-called KYC in order to continue operating legally in their country. If they refuse, they are often threatened with high penalties and even bans. But what does the term KYC mean anyway?

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Know your customers

You will encounter KYC procedures whenever you want to sign up on a new crypto exchange. In a procedure, the customer must first prove his identity via ID documents. The following documents can be used for this purpose:

  • Government issued photo ID
  • Driver’s license
  • Passport
  • PAN card
  • Voter ID card
  • Social security number

One way to use KYC procedures is to upload documents on the exchange website or send them by e-mail to the operator. Nowadays, however, this procedure has become rather uncommon. The video-ident procedure is now a more widespread method of verifying a customer’s identity.

In a face-to-face conversation via webcam or cell phone camera, the customer must go through a wide variety of tests with a customer service representative. It checks the security features of the ID document. It also tests whether you really are the person you say you are.

Why is KYC carried out?

With the help of KYC procedures, the merchant gets as much information about the customer as possible. But KYC is also intended to help protect against fraud, money laundering or illegal activities.

Legislators in numerous countries have now made this procedure mandatory.

The fight against money laundering

Guidelines, laws and regulations that serve to prevent financial crimes are summarized as AML (abbreviation for Anti-Money Laundering).

AML policies are country-specific, and global companies must ensure that they comply with the policies of all countries in which they operate. Regulators establish AML procedures for this purpose (e.g. Know Your Customer Policy), which companies must adhere to.

The disadvantages of KYC

Most people have no problem registering via a KYC procedure. However, you still shouldn’t trust your data to just any exchange. If you look at the past, there has been an increase in improper handling of customers’ sensitive data. For example, ID or passport data was stolen by hackers on the largest exchange Binance.

On Coinbase, KYC data was simply resold via third-party providers, such as Coinbase Ellipse and Chainalysis. Such improper handling of sensitive data makes many users angry and reduces their trust in the respective exchanges.

How can I protect my data?

Basically, you have few options to buy cryptocurrencies without KYC procedures. For this reason, you should always pay attention to the exchange from which you purchase Bitcoin & Co.

So don’t sign up with any exchange lightly. As a rule, large exchanges are safer than small ones.

There are also exchanges where you can trade without KYC. This is often the case with decentralized exchanges.

Bitcoin ATMs

An alternative is to buy cryptocurrencies through bitcoin ATMs. You can find suitable vending machines in your area via the site coinatmradar.com.

However, the increased privacy often comes with an increased price as well. The fees at these Bitcoin ATMs are usually significantly higher than at normal brokers or exchanges.

KYC from a company’s point of view

When choosing a suitable KYC provider for your company, the following aspects should be considered:

  • 1. the specific compliance requirements of the company

Define what level of compliance you need or want to meet. Some companies, especially in the financial sector, need to verify the identity of their customers because they are legally required to do so. In doing so, they must adhere to certain standards. When choosing a provider, it is therefore particularly important to ensure that it meets the appropriate compliance level and the necessary security standard.

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  • 2. the accuracy of the verification

Currently, the highest hit rate is achieved by combining Artificial Intelligence (AI) and Machine Learning with manual verifications. Providers typically calculate a score for each process from a number of factors (biometric verification, physical presence, etc.). Above a certain high score, the KYC process is automatically considered successful.

Unclear cases are submitted to a human for manual review. This approach always has a certain margin of error, but in return allows the verification process to be completed quickly. Reputable providers do not promise 100% accuracy, but instead are completely transparent about their methods.

  • 3. market coverage

Of course, the provider should support the official documents of the target group. However, don’t be confused by the absolute number of documents supported, but instead ask if the type of documents and databases you need are covered.

  • 4. privacy and security

Identity establishment involves highly sensitive personal data. Therefore, the provider’s infrastructure must be secure. Customer data must be appropriately encrypted and protected.

  • 5 user-friendliness

For end users, verification should fit seamlessly into the rest of the registration process. Users should be guided securely through each step. This includes making verification available in the language of your target audience.

Speed is another important factor. You should not subject your customers to long waiting times. Long waiting times have a negative impact on the conversion rate.