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Importance of KYC/AML & Cryptocurrency Regulations in Crypto Exchanges

06 August 2019 11:45, UTC
Akshara Singh

Imagine you are entering your office or organization without your identification card or else imagine you travel abroad without a valid passport. Will it be acceptable? No, right? The same gets applicable for cryptocurrency exchanges when the traders refuse to provide their data to the trading platforms.

21-06-2019 13:55:13  |   Investments
Anyhow, this procedure is to identify and get rid of fraudulent people from the exchange. Most of the popular financial institutions make use of KYC (Know Your Customers) and AML (Anti-Money Laundering) to prevent the use of cryptocurrencies for illegal purposes. Thanks for this identification feature! Now the financial organization completely get to know about the user base right from the source of income!

On another side, the customers are also benefited by understanding the services of the company and knowing his/her rights. Even countries have their own laws governing with KYC, AML regulations. Thus, these features enhance feasibility from both the ends.

What are KYC/AML & Cryptocurrency Regulations?

As the demand for cryptocurrency exchanges are increasing every day, it has become a need for the exchange platforms to bring in strict security measures. Therefore, KYC and AML were introduced in the trading platforms.

  • KYC (Know Your Customers)

KYC is the Customer Identification Process with a set of steps and processes that a company employs to confirm the identity of its users or customers. Usually, the KYC procedure involves the customers to submit identity proof such as Photo IDs, residential address, contact numbers, passports, driving license, etc. The primary motto of Know Your Customer Panel is to make sure unqualified people aren’t let to trade into the crypto exchanges. The unqualified people here refer to the users who have criminal record history, undocumented immigrants, etc. Additionally, it also provides the complete database of information which can act as a proof if any criminal activity persists in the future. Most of the popular online platforms such as forex trading have made it mandatory.

  • AML (Anti Money Laundering)

AML refers to the set of procedures, laws, and regulations created to monitor illegal activities in the industry. The activities include market manipulation, tax evasion, misuse of public funds, and other such activities. AML regulations require financial institutions to conduct due-diligence procedures to detect and prevent fraudulent activities.

  • Cryptocurrency Regulations

In addition to KYC/AML, Cryptocurrency Regulations are more crucial since a great number of funds are poured into the market. Government and financial organizations feel that they need to closely monitor the transactions. Particularly when it comes to cryptocurrencies, the transactions are completely anonymous and untraceable. Therefore, regulations were being imposed by various countries involved in cryptocurrencies.

Why Crypto Exchanges need KYC/AML & Cryptocurrency Regulations?

13-02-2019 14:20:49  |   Investments
Researchers at Coinfirm evaluated that there are around 216 trading platforms available in the crypto market out of which only 26% of them fulfil the requirements of KYC and AML. Further, 69% of crypto exchanges were completely non-transparent and the standards were incomplete. Hence Coin square, Coinbase, Gemini and Poloniex were considered as the safest exchange from the regulatory point of view.

Cryptocurrency exchanges handle the KYC process in four general levels:

  • Customer Acceptance Policy
  • With this policy, it accepts only the clients whose identity is established by conducting due diligence appropriate to the risk profile of the client.
  • Customer Identification Program
  • This is one of the U.S. Requirements where the financial instruments should verify the identity of individuals who are wishing to conduct financial transactions.
  • Keeping an Eye on Transactions
  • Seamless monitoring of transactions to ensure regulatory compliance, figuring out suspicious activities.
  • Risk Management
  • If anything suspicious is found, the final process is to manage the risks.

Based on the details available, the crypto exchanges handle these stages. Usually, there are a couple of crypto exchanges available. Fiat-to-Crypto Exchanges provide a way to enter the cryptocurrency market. With these exchanges, traders can exchange fiat currencies like Dollars, Euros, Rupees, etc. While on the other hand, Crypto-to-Crypto Exchanges allows the users to exchange cryptocurrency for other cryptocurrencies.

Popular examples of Fiat-to-Crypto Exchanges include Coinbase, Kraken, Bitfinex, Gemini, Bittrex, etc. Fiat-to-Crypto Exchanges do KYC at least to a certain extent since they deal with Fiat currencies. Here is how they handle the KYC process, according to Cointelegraph:

  • In Coinbase, there is no KYC to send, receive the cryptocurrencies. While in the case of AML, the transaction will be monitored continuously. 
  • In Gemini, KYC becomes applicable once the account is activated. Here AML is monitored through Nasdaq’s market surveillance team.
  • In Bitfinex, KYC is applicable upon Fiat trading not for Crypto trading. While AML is monitored through Irisium’s market surveillance team.

On the flip side, Crypto-to-Crypto Exchanges such as Binance, OKEx, Huobi, etc handle the KYC process like this:

  • In the case of Binance, there is no KYC required upto 2 BTC. AML is monitored by Chain analysis trade monitoring solution.
  • In OKEx, KYC is not required for crypto deposits. To withdraw and make use of advanced features, KYC will be required. While the source of AML monitoring is still unknown.

Thus, when creating a cryptocurrency exchange it is crucial that your exchange comes with KYC/AML to get rid of fraudulent activities.

Is KYC/AML & Crypto Regulations here to stay?

Most of the industry experts have recorded their views on the future of KYC/AML & Crypto Regulations. They feel, before implementing these strategies in the market, traders should ensure transparency and accountability with their own digital currencies. Added, they should be ready to accept penalties in case of any non-compliance occurs. As more of the regulations and compliance standards emerge, specifically around AML and KYC, this would help catalyze traditional investment in the market. Thus, most of the cryptocurrency startups have started building cryptocurrency exchanges by understanding the importance of KYC & AML in them.