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Crypto Compliance: The Importance of AML and KYC In the Modern Finance World

7 mins read

Cryptocurrency has turned out to be a revolutionary innovation for the world. And as its popularity grows drastically especially through the recent years, the demand for crypto regulations have risen due to the financial crime related to it, persuading regulators to build a framework to help regulate the massive crypto market.  

  • Crypto AML is a compulsory regulatory process that consists of laws and practices designed to halt any sort of criminal activities into the financial landscape.
  • AML helps control the flow of money in the digital financial circle, making it difficult for criminals to carry out illegal activities. 
  • Crypto KYC is a subset of AML compliance, dedicated to customer identity verification.
  • The KYC process is crucial as it enables criminal investigators to connect suspicious cryptocurrency and digital addresses to real-world entities, which will help in reporting criminal activities.
  • KYC process helps in maintaining a detailed risk profile for each customer through which crypto exchanges can easily detect and identify users that are misusing the exchange’s services, helping avoid crimes such as money laundering and terrorism financing.

It’s only until recently that regulations in crypto have moved to the top of the policy agenda. The reason partly remains the fact that it’s only in the past few years that cryptocurrency has been aimed to be used as an everyday money in the mainstream financial world. 

And just like any other financial infrastructures, crypto needs to be built upon trust. This is where regulations play a major role in the world of blockchain and cryptocurrency. By incorporating mandatory processes that verify the identity of recipients and ensure that steps are being taken to prevent money laundering and other fraudulent activities from taking place, that trust is built. 

Today, we take a look at two mandatory regulatory processes in the world of crypto: what they are, what importance they hold, and how it affects the overall crypto ecosystem. 

AML: Anti Money Laundering

Cryptocurrency anti-money laundering (AML) is a compulsory regulatory process that consists of laws and practices designed to halt any sort of criminal activities into the financial landscape, including converting the illegally obtained cryptocurrencies into fiat currencies. 

AML remains a primary risk-based approach. According to a report by Chainalysis, DeFi protocols saw the most growth by far in usage for money laundering at 1,964%, in 2021. 

With billions of fiat currencies being laundered each month, and this money often finding its way into the world of crypto, processes such as AML help control the flow of money in the digital financial circle, making it difficult for criminals to carry out illegal activities. 

AML regulations require crypto companies to perform their due diligence, which basically means knowing who your customers are and where exactly their money comes from. Apart from its primary role of combating crime and maintaining crime-free global financial services, AML process can also provide the following benefits:

  • Secured customer data.
  • Creation of automated fraud detection services that help halt identity threat.
  • Usage of global customer databases that help you check the backgrounds of new customers against the ones present in the list of sanctioned individuals. 
  • Monitoring transactions closely and reporting illegal or suspicious activity within the financial system.
  • Reduction of fines or costs associated with non-compliance.

KYC: Know Your Customer

Cryptocurrency KYC is a subset of AML compliance, dedicated to customer identity verification. KYC is a vital process for crypto as it helps identity theft and fraud by collecting a legit database and verifying the details of customers to truly understand who they are. KYC remains a mandatory process even in traditional financial systems when opening new accounts, applying for loans, making investments, and doing other important actions. 

In a nutshell, the KYC process is crucial as it enables criminal investigators to connect suspicious cryptocurrency and digital addresses to real-world entities, which will help in reporting criminal activities during the time of the event.

KYC in traditional finance requires necessary steps such as ID card validation, face verification, followed by biometric authentication. Moreover, banks may also require proof of address, such as a copy of the recent utility bill.

For the crypto industry, KYC requirements remain less standardized, with a centralized cryptocurrency exchange asking for your full name, date of birth, and residential address. Once these details are filled out, the crypto exchange will ask you for a valid photo of a government-issued ID card, such as a legal driver’s license or a passport copy. Once done, the exchange will then verify your identity. 

KYC process helps in maintaining a detailed risk profile for each customer through which crypto exchanges can easily detect and identify users that are misusing the exchange’s services, helping avoid crimes such as money laundering and terrorism financing. Apart from this, KYC also helps in the following:

  • Improved customer transparency and trust that shows that the crypto exchange is taking steps to protect customers’ accounts, building trust and providing loyalty.
  • Lowered risk for money laundering and other scams
  • Reduced legal risk as KYC can allow companies to be ahead of their game and reduce their risk of legal challenges as well as regulatory penalties. 
  • Enhanced stability of the crypto market as a whole that helps boost its market value.

Conclusion

While many still debate over the fact that cryptocurrency should not be burdened by regulations, it is important to note that the benefits of regulations outweigh the risks. The prevention of money laundering and other criminal activities is vital to cryptocurrency and in order to protect the public from the growing scams, it is imperative for processes such as AML and KYC to be put in place.

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