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Hashbon Space: KYC

Dear HASHtronauts!

We dedicate our “Hashbon Space Edition” to all of you who are already familiar with the cryptocurrency world and to those who are just starting to deal with crypto in detail. So, make yourself comfortable, get cozy in a blanket, pour your delicious tea — tonight’s topic is KYC.

What is KYC?

KYC (Know Your Customer) is a financial institution’s primary modus operandi, which obliges them to verify the private information of a person before this person can conduct any transactions. This identification serves many purposes: clientele understanding, monitoring operations, reducing liability, combating bribery and corruption. This protects companies from dealing with fraudsters and ensures the safety of customer assets.

As part of the procedure, it is necessary to confirm a person’s identity by verifying their ID documents. Crypto exchanges have the right to determine the stages of verification themselves, but here are the user data that are mostly required:

  • Full name
  • Date of Birth
  • E-mail
  • Phone number
  • Country and address of residence
  • ID (passport, driving license, etc.)
  • Insurance number

To prove data reliability, the phone number must be confirmed through an SMS code, passport data through photos of documents and a selfie with them, and a residential address — for example, a utility bill.

Typically, customers are required to provide information for KYC during account registration, and sometimes in the case of information changes. For example, if you officially changed your name a few months after account registration, you will have to verify your updated information for KYC.

If you do not complete KYC, you will not have full access to all features of cryptocurrency exchanges. So, for example, Binance.com without verification only allows customers to register accounts, use basic functions and complete limited operations. To gain full access, users need to complete verification.

It should be mentioned that KYC is often used for IDO participation. There is no strict regulation or list of rules, because each IDO can add their own requirements, so you need to do your due diligence by reading the IDO’s rules of participation carefully.

How does it work?

KYC’s software aims to compile a database by collecting required user information. Specialized software helps firms with managing the identity verification process by automatically identifying high-risk customers. It reduces the chance of human error and prevents deliberately provided false information.

KYC verification is a multi-stage procedure that includes collection and analysis of customers’ personal information. In order to verify this data, institutions send the information to a variety of independent third-party reviewers. These organizations compare it with official databases to confirm that the provided information is correct and matches in all aspects with the user’s uploaded data. Verifiers also compare a person’s information with global databases of criminals.

Through these procedures, financial institutions and service providers can determine each client’s risk level.

KYC’s history

The concept of crypto KYC in the form of CDD (Customer Due Diligence) Rule appeared in official documents of the Department of the Treasury for combating financial crimes FinCEN USA in 2016. In early 2021, FinCEN proposed that crypto and digital asset market participants should verify customer identities. For example, Coinbase, which works with more than 10 million users, requires users to provide personal identification data to confirm the absence of suspicious activity. In return, the crypto-exchange offers security transactions.

The main goal of KYC was to combat illegal activity and identify suspicious behavior at an early stage. With the help of personal data, cryptocurrency exchanges track transaction patterns, which, among other things, contributes to the fight against money laundering and terrorist financing.

KYC requirements are mandatory on leading cryptocurrency exchanges. They ensure that they’re in compliance with regulations and laws. In the past, crypto exchanges rarely requested user information for KYC. But as the price of cryptocurrencies and its popularity rises, crimes related to money laundering and other illegal activities have become a growing concern.

How does the KYC’s procedure work?

Verification procedures may vary, it depends on the nature of the business, but they serve the same purpose. The main stages of the procedure are the collection and verification of data. This also includes due diligence and ongoing monitoring.

KYC verification usually consists of 3 parts:

1. Customer Identification Program (CIP)

CIP consists of the collection and verification of user information. Cryptocurrency exchanges and other institutions start this procedure after the registration process has been completed.

2. Customer Due Diligence (CDD)

Sometimes, after verification, the company decides to additionally verify the client’s background. Its purpose is risk assessment. If the client was involved in financial scams or they’ve been under investigation in the past, this will be revealed during the background check process.

3. Ongoing monitoring

Ongoing monitoring ensures that verified data is up-to-date and allows the system to analyze suspicious transactions carefully. The procedure enables institutions to track large transactions to countries, which are involved in terrorism, as stated by the US government. Depending on the investigation’s outcome, the exchange may suspend the account in question and report their findings to regulatory and law enforcement agencies.

KYC regulations all over the world

European law consists of regulations (which are binding across the EU) and directives (which set goals). For KYC, the two most relevant pieces of European legislation are the GDPR (which is a regulation and hence uniform across the EU) and the fifth AML (a directive, along with its four predecessors). By transposing AML directives into national laws, countries can impose stricter requirements.

Regulation rules depend on the country. “The German implementation of 5AML (also known as the GwG), which requires an onerous video KYC process that prescribes in great detail what a customer must do to pass identification and verification. While this process works relatively well in the German market, it hurts conversion in other European markets. Other examples of additional requirements imposed by national law include Spain (requires enhanced liveliness detection), France (requires a secondary ID document), and Italy (requires seven additional risk checks)” says Fourthline. If you want to discover regulation rules more deeply, here is the list of countries and their crypto KYC regulations.

Unfortunately, some users believe that full verification is a violation of blockchain technology’s principle of anonymity. However, KYC is an indicator that crypto exchanges provide a safe space for everyone to conduct transactions.

KYC guarantees transaction security, thus the client can be sure that:

  • trading on the platform is safe;
  • the platform is protected from fraud;
  • the client replenishes the account directly without extra charges;
  • recovering an account in case of loss of access will be easy.

Stay tuned to learn more about crypto with Hashbon Space Edition!

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Hashbon FiRe

Hashbon FiRe

Finance Reinvented Crypto Ecosystem. Including DeFi CDEX platform Hashbon Rocket, payment gateway Hashbon React and crypto wallet Hashbon Quant