Oct 27, 2021

6 min read

The importance of AML & KYC for the crypto market

Cryptocurrencies have been gaining more and more popularity over recent years. Since digital assets are considered anonymous due to the technology used, the crypto sector has become popular for criminal activity.

As cryptocurrencies begin to compete with fiat currencies as a preferred medium of exchange for both legal and illegal activities, regulatory bodies worldwide are introducing strict anti-money laundering (AML) legislation. We will shed light on the AML policy and its crucial component — The Know Your Customer (KYC) procedure.

Understanding Anti-Money Laundering policy

AML functions as a system of measures and rules, which helps prevent the use of money in different kinds of financial crime such as bribery and corruption, tax evasion, etc. Nowadays, global regulatory authorities are putting efforts to curb the use of cryptocurrencies in illegal activities by implementing anti-money laundering legislation.

Cryptocurrency Money Laundering Scheme

A financial institution must adhere to AML policies that are compliant with its domestic AML regulations. These policies typically contain the Know Your Customer (KYC) procedure, risk-based AML measures, ongoing risk assessment and monitoring, training for company staff, internal auditing, and controls.

KYC is an essential element of the anti-money laundering system. It involves verifying the identity and performing enhanced due diligence of customers engaged in financial transactions. The main goal of the Know Your Customer policy is to curb illegal activities and to increase transparency.

Opening an account on most centralized exchanges (CEXes) and wallets usually requires submitting identity verification documents. Typically, if you don’t complete the KYC process, you will get access only to the basic features, such as limited transactions and low deposit and withdrawal limits.

Depending on what kind of platform you’re using, KYC processes vary. At the most basic level, it includes data collection and verification.

The three main stages of KYC verification include:

1. Customer Identification Program (CIP)

The first step is the collection and verification of customer data. Unlike traditional financial institutions, this stage on CEXes usually comes after registration.

2. Customer Due Diligence (CDD)

After identity has been verified, a background check may be performed. Its goal is to identify risks and make an informed decision. For instance, if the customer has been flagged for financial fraud in the past.

3. Ongoing Monitoring

This step will ensure that your information is up to date. It also allows the system to scrutinize any suspicious transactions continually. If the exchange suspects that a customer has violated financial regulations, it may temporarily suspend the account and notify the necessary authorities.

The main idea behind the blockchain is that you can do transactions that do not require a third party. This is great for reducing the fees and time needed for a transfer of assets. It also means that you can do business with almost anyone in the world with little to no bureaucracy.

Yet, with KYC/AML, centralized exchanges and wallets collect extensive personal information from the customers. It goes against the very nature of blockchains and decentralization. So, AML/KYC requirements give cryptocurrency exchanges similar features to traditional financial institutions.

For users who do not want their financial data collected, losing anonymity can be a high price to pay. Even though most cryptocurrency exchanges promise to protect private data, the customers’ fears are warranted since many CEXes still do not have robust systems to secure clientele information.

Furthermore, the centralization of crypto exchanges also raises another issue, such as ensuring data security. Hackers are always on the lookout for ways to access sensitive data and use it for malicious purposes. That is why CEXes are constantly working on improving security measures to eliminate various software loopholes.

Binance case

To ensure compliance, Binance has three different levels of customer verification: verified, verified plus, and enterprise verification. The tier upgrade gives you lower fees and higher withdrawal limits. Basic verification requires users to submit a legal name and address. An interim check is the next stage where you need to submit a picture of your identification document or ID. Furthermore, they forbid users from entering restricted areas, such as the United States, with strict compliance requirements. You can check more information on the official Binance website.

Verified vs. Verified Plus tiers of user verification on Binance

Source: Binance.com

Kraken case

Another top-tier exchange — Kraken — provides five levels of verification (levels 0 to 4), depending on how you intend to use your account. As with Binance, the higher is your level, the less withdrawal restrictions you have.

All accounts need to be verified with your email, full name, date of birth, phone number, and physical address. The non-starter accounts must be associated with a real person, so you will need to submit employment information, social security number, ID, Proof of Residency, and face photo. There may be geographic restrictions depending on the type of account, the services available, and the transaction levels allowed. You can check all requirements in the screenshot below.

Tiers of user verification on Kraken

Source: Cointelegraph.com

To comply with anti-money laundering laws, we have developed an AML policy. We review and revise it to ensure that we’re obeying any applicable rules and procedures.

We have built a robust framework of internal procedures, including:

  • Customer Identification Program (“CIP”) that is used to identify suspicious activity and prevent fraud.
  • Filing of Suspicious Activity Reports (“SARs”) implies monitoring transactions for unusual customer activity patterns.
  • Currency Transaction Reports (“CTRs”) which means recording and filling reports on transactions exceeding a particular amount.
  • As well as other reporting requirements and audits.

Furthermore, we are constantly working on the improvement of our platform’s security. The information you provide is stored safely and securely. Our smart contract is audited, and we are constantly working on finding potential code breaches. We’re also reviewing our company’s AML policy to ensure it’s up-to-date, both internal and independent.

Furthermore, we have developed a KYC policy with three tiers. Each verification stage provides different levels of access to financial instruments on the PointPay platform. We will share the details with our community in the upcoming weeks.

On the one hand, implementation of KYC/AML policies means centralization and loss of anonymity. However, with that said, it allows financial businesses to mitigate risk, improve the security of their systems, protect the integrity and keep criminals off their books. This, in turn, fosters greater trust and reassurance with their customers.

What is more important is that integrating regulatory procedures is essential for the industry’s long-term growth. It attracts more institutional investors, thus supporting the maturity of the crypto market.

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