KYC or Know Your Customer is a financial regulatory standard employed to provide background checks concerning the users of a financial service and their potential relation to financial crime. This is done to abide by Anti-Money Laundering (AML) regulatory standards. Generally, KYC standards are regulated by a central banking authority.
Different crypto firms have been forced to roll out greater level KYC information to comply with growing regulatory pressure in different countries.
In non-crypto financial institutions, KYC is standard practice. Requiring customers to provide information to the institution that they are conducting business with. This information will include personal information, financial positions, risk tolerances, etc.
KYC also requires institutions to compile and store this information. Conducting a background check by cross-referencing the provided data with information provided by financial crime regulatory bodies. This is done to alert regulatory bodies to suspicious financial activity, prevent money laundering, and the prevention of terroristic funding.
Anti-Money Laundering Directive
Cryptocurrencies are often not beholden to the same regulatory bodies as other financial institutions though many still invoke their own anti-money laundering mandates. This is done in response to mounting pressures by large financial groups and governmental bodies in an increased attempt to comply with standard regulatory practice.
As such many MSBs and other cryptocurrency platforms have begun to roll out their standard of KYC. Usually by requiring prospective customers to provide a photo identification of themselves, while in possession of an officially recognized ID. Such as a passport, driver’s license, etc.
This information is stored and cross-referenced so as to ensure that suspicious people or activities can be subsequently dealt with. For example, Etherum has its own approach to KYC, called KYCware. This is a decentralized means of identity verification that automatically cross-references individuals with global databases and watchlists. In this sense, many cryptocurrency exchanges and other MSBs have started to move in line with other financial institutions with some rather impressive technical solutions geared at meeting AML and KYC practices.
Though not all cryptocurrency platforms require this level of stringent identification and therefore are not beholden to the same, if any, regulatory standards. This lack of regulatory standard may be in a prospective customer’s favor, or it may represent a sizable risk as the business may be hiding some bad-faith actors.