What Is KYC?

As a crypto trader looking to open an account with reputable cryptocurrency exchanges or searching about the latest crypto news, you’ve probably come across the term, KYC, more than once. The term is used widely in the Fintech and traditional banking industries and is now an important part of blockchain technology.

What Does KYC Stand for?

KYC stands for Know Your Customer, which, put simply, means knowing who your registered users or client are. In theory, this should be simple enough, but in practice, it is much harder. For starters, while most financial regulators or authorities require financial institutions to carry out KYC, they do not specify what exactly needs to be done.

Certain authorities do require that banks or exchanges collect a minimum set of documents and personal information. This data would normally include:

• Name
• Address
• ID number
• Country of Residence
• Date of Birth

Beyond this information, however, it is up to the individual institution to decide what needs to be done to confidently say that they know their clients. This has led to an incredible variety of KYC procedures, even between two seemingly identical platforms.

Why is KYC Important?

An important element of KYC is ensuring that users do not perform transactions relating to money laundering or financing of terrorism. The anonymity and lack of central control of the cryptocurrency industry have inevitably led to criminals using these digital currencies to funnel funds illegally.

KYC can help combat the funding of terrorism since authorities could request certain user’s details from exchanges. According to several studies, exchanges which do not carry out any KYC facilitate a substantially higher number of suspicious transactions than those that implement even the most basic forms of identification. Ransomware attacks are increasingly linked to unregulated exchanges which do not have any KYC procedures in place.

A Necessity or a Burdensome Task (for customers)?

In certain cases, KYC is a necessity which regulated cryptocurrency exchanges cannot get away from. However, understanding who their customers are and what they are using their platform for can help the operator in many ways. 

According to CoinMarketCap, the fiat to crypto exchanges which require some level of KYC tend to experience larger trading volumes than those which do not perform any checks. This statistic is especially important since new crypto traders and investors would use these exchanges when entering the crypto community. Therefore, it is safe to assume that by implementing KYC checks these platforms are gaining the trust of institutional private investors who might have otherwise sought alternative markets.

CEX.io is an international cryptocurrency exchange which caters to both novice and advanced traders. Supporting a variety of fiat-to-crypto and crypto-to-crypto transactions, CEX.io is a regulated exchange, registered as a Money Service Business with FinCEN. The exchange’s verification requirements vary depending on whether you are using a credit card or bank transfer, but basically require you to provide ID documentation. It is usually possible to verify your account within 15 minutes, although it can take longer at times.

KYC and User-friendliness

What case studies like CEX.io and other platforms prove is that KYC does not need to be a lengthy or complicated process. It also shows that this security step can become an integral step to moving cryptocurrency to mainstream use. KYC instils a level of trust amongst buyers and sellers, ensuring that both are better protected in cases of fraudulent activity.

Knowing your customer is also important for those looking to participating in online marketplaces. Today, there are many places where you can buy using Bitcoin, but how can you know whether a seller is genuine or not? KYC procedures and regulation can help keep you safe.

Is Decentralization Diminished because of KYC?

Some may think that KYC goes against Satoshi Nakamoto‘s decentralisation goals, but this is not necessarily the case. Although these practices began in centralised institutions, such as banks and insurance agencies, they have now been adapted to decentralised environments. Having teams of people or AI monitoring a cryptocurrency’s blockchain does not suddenly transform it into a centralised system, it just makes it a monitored decentralised system.

In addition, thanks to a cryptocurrency’s decentralised nature, it is possible to carry out KYC and checks for anti-money laundering and financing of terrorism in a much more transparent manner. Multiple authorities or companies can carry out these checks without needing permission from one another. 

For this very reason, cryptocurrency is seen by some to be the answer to eliminating the black market, which today is facilitated by cash transactions and unregulated cryptocurrency exchanges. With more platforms carrying out KYC, the cryptocurrency’s decentralisation will not be affected, but it will help bring more users to digital currencies, encouraged by governments and institutions looking to eliminate financial crimes.

What Levels of KYC Policies Exist?

Due to different and vague rules around the world, there are a variety of KYC levels which are in use by the different exchange platforms.

Zero KYC

Platforms which do not operate any KYC procedures will not request any identification documentation from you but may pose strict limits or other conditions. One example is the popular P2P trading platform, LocalBitcoins, which brings buyers and sellers together but takes no responsibility for fraudulent transactions.

Basic KYC

Basic KYC would allow you to carry out minimal transactions on certain exchanges, though you would probably need to provide certain personal information first. This type of KYC would normally allow you to use cards or PayPal to buy Bitcoin, with the payment provider and platform sharing your information.

Full KYC

By providing full KYC documentation and information you would normally be granted full access to a cryptocurrency’s features and limits. You would normally be requested to provide photo ID together with a utility bill or bank statement issued within the preceding 3 months.