AML and KYC Guidance for Crypto Exchanges and Wallets

2021年9月21日

Because of the risks involved, no-KYC exchanges are viewed as illegal in some countries. For example, the US, South Korea, and Canada require all legitimate crypto exchanges to collect KYC data from their customers. While cryptocurrencies offer more privacy than fiat-based currencies, some users prefer to leave no digital footprint at all.

The Financial Action Task Force (FATF) was established in 1989 to help combat international money laundering and terror funding. While technically not legally-binding, The FATF Guidance sets out rules for its 37 members. This means that all cryptocurrency exchanges must carry out KYC and install effective AML programs, regardless of the currencies they support. Closely linked to money laundering, terrorism is able to flourish when radical organizations fund decentralized cells around the world.

Know Your Crypto: How KYC and AML are Helping Cryptocurrencies Go Mainstream

The last couple of years have seen sky-high fines being slapped on financial institutions that don’t fulfill AML stipulations. Users must provide all PII, a valid https://www.xcritical.com/blog/aml-crypto-how-do-aml-regulations-apply-to-exchanges/ government ID, and a social security number upon registration. To speed up the process and ensure accuracy, Coinbase uses a digital ID solution, similar to GetID.

• Luckily, GetID solves all these problems with one ready-made automated KYC solution.
• That’s why we’ve performed a comprehensive security analysis of all hacks & phishing campaigns to date.
• At the same time, illegal cryptocurrency remains at the disposal of the owner — to avoid transferring it and subsequently getting blocked on an exchange.
• The cryptocurrency gambling sites are reported to be the most common tools for money laundering.
• Finally,
  exchanges should remain current on the newest KYC regulations in various
  countries.
• While AML procedures deal with the general movement of money related to illegal activities, CFT concentrates on preventing the movement of money related to terrorism.
• Kraken founder Jesse Powell decided to build the exchange after seeing the struggles of the then-largest — but now defunct — crypto exchange Mt. Gox.

For exchanges to work, people need to trade coins, and to trade coins, customers must trust that their money is safe. KYC stands for Know Your Customer and is the initial customer due diligence stage in AML processes. When a financial institution onboards a new customer, KYC procedures are in place to identify and verify that a customer is who they say they are. This enables financial institutions to assign a risk value to this customer based on their propensity for financial crime.

Integrated Compliance

With the growth of cryptocurrencies, the number of crypto exchanges also increased significantly. Not only do exchanges now have to fork out money to register with regulatory bodies, but budgets also need to be put in place to pay for verification processes and larger compliance teams. In the US, the Treasury Department’s Office of Foreign Assets Control (OFAC) considers non-compliance to be a serious risk to national security, as it invites money https://www.xcritical.com/ laundering, which harms economies and strengthens criminal activity. Unfortunate traders can fall victim to dots and commas scams, chargebacks, dirty money tricks, social engineering, and much more. In this sense, KYC becomes all the more important as it highlights high-risk users and roots out criminals. One of the most well-established exchanges, Coinbase, allows users to send and store cryptocurrency without full KYC procedures being activated.

To identify
potential money laundering or terrorist financing activities, these systems
should use a mix of machine learning and human expertise. However, the
anonymous nature of cryptocurrency transactions makes it difficult to
successfully execute AML regulations. Finally,
exchanges should remain current on the newest KYC regulations in various
countries. This can be accomplished by employing KYC compliance experts or by
using third-party KYC verification services. However, the
anonymous nature of cryptocurrency transactions makes it difficult to
successfully execute KYC regulations. Albeit not in the same category as fiat (state issued/sanctioned) currency, cryptocurrency is growing into a monetary system that is moving beyond being viewed as the ‘wild west of money’.

What Does KYC Look Like in Crypto Exchanges?

Once the framework enters into force, EU crypto players will be able to legally conduct their activities within all EU member states. To a certain degree, the MiCA regulation framework mirrors the existing MiFID framework. Today, every person or firm planning to build a secure and legal crypto project, should be aware of these rules and comply with them. Different industry groups are working to create coordinated systems to comply with those rules. If you require specific features or enhancements for your exchange, no matter how big or small, we are happy to oblige. Our development rates are competitive and because we are highly familiar and skilled with our source code, we can usually develop new features for less than the cost to perform the same development in-house.

KYC and AML operations deliver security and create the ground to work with fiat and virtual money, enter the global market, and collaborate with financial organizations. Simultaneously, KYC helps prevent crimes such as money laundering and identity theft, protects customer accounts from unauthorized third-party access, and allows to avoid reputational damage. The conventional KYC process consists of a range of due diligence measures, along with ongoing screening and monitoring as customers engage with the services that a particular firm offers.

A Brief History of AML Regulations

Another issue is when a crypto company files for bankruptcy protection and its documents become public as court records. CoolBitX has signed MoUs with 18 VASPs worldwide and recently joined forces with Elliptic in a combined quest to help crypto companies comply with the FATF Standards. The Patriot Act aimed to eradicate the funding of terrorism through the financial sector. Embedded KYC, also known as the Customer Identification Program (CIP) into the BSA as part of the U.S. This article takes a closer look at what is meant with AML/KYC, how KYC fits in AML efforts, AML/KYC’s history, who needs to adhere to it, current KYC limitations and how the crypto industry is impacted.