Many crypto exchanges make Know Your Customer (KYC) necessary before transacting or unlocking the full range of services offered on the platform. Accordingly, enforcing KYC measures is necessary to comply with international Anti-Money Laundering (AML) laws.

Notably, complying with the AML laws enables legal operation within a region and prevents using crypto for terrorism. In a nutshell, crypto exchanges comply with regional Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) laws by instituting KYC.

In this piece, we’ll explore how KYC is an effective AML and CFT measure in crypto. So, let’s dive in!

The KYC Process

It’s an internationally legally required step when opening an account on a crypto exchange and in financial institutions. Accordingly, it involves submitting a government-issued means of identification, proof of address and biometric data including snapshots, portrait video, etc.

Notedly, the required data and documents vary between exchanges but fall broadly into the above categories. Similarly, it can also vary between regions. Government-issued ID could include a national passport, driver’s license or any unique government-issued identifier in the region.

With utility bills or bank statements, crypto exchanges get other required information like the proof of address of the intending customers.

After setting a username, inputting email and choosing a password to open a new account on an exchange, the KYC prompt usually comes up next. After submitting the documents and info, they are verified before the new user can access services on the platform.

Why KYC is an Effective AML Practice in Crypto

Crypto transactions are largely “anonymous”, requiring only a string of letters and numbers that make a wallet address. Consequently, some entities misuse the anonymity and freedom of crypto transactions to commit illegal activities, notably money laundering.

Transacting or moving fiat money doesn’t offer such freedom, making crypto an attractive avenue for money laundering. Hence, the criminals convert their fiat into crypto which can be moved almost untraceably.

Even when they can be traced with sophisticated tech, they can only be observed moving between wallets on the blockchain without being anchored to a specific entity.

Consequently, regulators had to institute KYC as an effective AML measure, where every crypto user accessing services on a centralized exchange provides government-issued documents that tie their verified identity to their address on the platform.

Due to KYC, regulators and investigators can now trace illegal funds converted to crypto and apprehend the party involved: AML achieved. The authorities can also freeze the crypto assets during ongoing investigations.

In Conclusion

KYC has emerged as a critical tool in the fight against money laundering (AML) and terrorism financing in the crypto space. By requiring new users to verify their identities with government-issued documents, exchanges help regulators track illicit activities and enforce AML/CFT laws.

Although crypto transactions offer a degree of anonymity, KYC bridges the gap by ensuring accountability and transparency.