KYC standards have been introduced to protect against fraud, money laundering, corruption and terrorist financing. This is because financial institutions in some jurisdictions are required to “know your customer”, which means they must ask for proof of a person’s identity as part of the account creation process.
By implementing KYC processes, an organization manages its risk of being involved in criminal activities. The visibility that KYC provides allows institutions to see illicit money flows and refuse to serve terrorist organizations. Faced with the success of cryptocurrencies, we are right to wonder if KYC can ruin everything; here are the details of these possible hostilities.
Cryptocurrencies Face KYC Procedures
The original goal of blockchain and cryptography is to provide an alternative to traditional centralized financial systems. Cryptocurrencies operate in a decentralized financial system that avoids the risks associated with banks making risky financial decisions. Cryptocurrency exchanges and similar organizations perform many of the same functions as traditional financial institutions. Therefore, they are subject to the same rules and requirements where such rules exist.
More than a dozen countries have KYC regulations designed to protect against fraudulent and illegal financial activities. Cryptocurrency exchanges and other entities located in these countries or providing services to their citizens are also subject to these KYC rules. Blockchain technology is designed to be pseudonymized, and KYC provides much of the transparency used to identify perpetrators of attacks and other illegal activities on the blockchain. If this system becomes effective, we may fear dark times…
Possibility of a decentralized verification process
KYC measures are suitable for the classical financial universe, but it is possible that the process will be created for cryptocurrencies. It is possible that in order to comply with KYC measures, cryptocurrency exchanges:
- Collect personal information (PII) from your customers, including full name, location, date of birth and address.
- Compare this information with their official government-issued ID, such as a passport or government-issued driver’s license, and proof of address, such as a utility bill.
- Verification of the client’s identity against official databases that contain information on politically exposed persons (PEP) and persons under sanctions.
These steps help financial institutions determine the risk of money laundering and financial crime using virtual currencies for each client. If everything is checked, the client is allowed to engage in certain activities on the cryptocurrency exchange.
KYC measures can jeopardize the theoretical anonymity of blockchain and cryptocurrencies while facing the real limitations of laws and regulations. In addition, KYC provides some level of visibility to blockchain entities, but this visibility is imperfect and criminals can evade it. At this point, it is too early to comment on KYC and its possible actions with cryptocurrencies.
Do you know the BFF expression? Best friends forever? Well, I’m Annaelle, Victoria’s best friend. Passionate about cryptography myself, I came to give him a helping hand on his blog… by lending him my pen 🙂
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