What is KYC? The Importance of Identity Verification in Digital Financial Transactions

In the context of rapidly developing blockchain technology, customer identity verification (KYC) has become a mandatory requirement for modern financial institutions. So what is KYC? Why does it play an important role in online transactions? This article will help you better understand this concept and its practical applications.

What Is KYC?

KYC stands for “Know Your Customer” (Understanding the Customer), a mandatory verification process that financial service companies must perform. Through the KYC process, organizations will identify customers based on criteria such as risk tolerance, investment knowledge, and securities understanding.

The main purpose of KYC is not only to verify identity but also to help financial institutions combat money laundering (AML) and terrorism financing. Currently, KYC is a common compliance step at cryptocurrency exchanges, forex, and international securities platforms.

eKYC - The Digital Version of KYC

eKYC (electronic Know Your Customer) refers to the fully online KYC process. This allows customers to complete identity verification remotely, quickly and more securely. Essentially, what is eKYC - it is still KYC but optimized for the digital environment.

Common information used for verification includes: ID cards, Passports, Driver’s Licenses, Bank Statements, and other identification documents. These documents help organizations confirm the legal identity of users before granting trading accounts.

How Does the KYC Process Work?

Step 1: CIP - Customer Identification Program

CIP (Customer Identification Program) is the first step in the KYC process. According to statistics, in 2017 in the US, $16.8 billion was stolen through identity theft, affecting over 17 million people directly. Therefore, identity verification has become an urgent requirement.

At this stage, organizations will collect basic information such as:

• Full name
• Date of birth
• Permanent address
• Other related identification details

Step 2: CDD - Customer Due Diligence

CDD (Customer Due Diligence) is the next step, helping organizations perform more thorough customer assessments. After verifying identity, they will check background information to assess risk and classify customers.

This process includes three different levels:

• SDD (Simplified Due Diligence): Basic assessment for low-risk customers
• CDD (Basic Customer Due Diligence): Standard assessment
• EDD (Enhanced Due Diligence): Advanced assessment for high-risk customers

Step 3: Continuous Monitoring

Financial organizations need to establish ongoing customer monitoring programs, including:

• Monitoring sudden activity spikes
• Tracking unusual cross-border activities
• Detecting potentially dangerous media outlets

Why Is KYC Important?

KYC is not only a legal compliance requirement but also a vital protective tool. The importance of KYC is evident in many aspects:

Prevent Identity Theft: KYC establishes legitimate identities, preventing fake accounts and misuse.

Anti-Money Laundering (AML): The KYC process prevents criminals from using fake accounts to store money from illegal activities such as drug trafficking, human trafficking, and scams.

Prevent Financial Fraud: KYC helps detect actions involving fake IDs, forged documents, or registering loans with incorrect accounts.

Improve Cryptocurrency Image: Strict compliance with KYC helps cryptocurrencies eliminate links to money laundering, encouraging wider adoption.

Difference Between KYC and AML

Many people often confuse KYC and AML. In fact, AML (Anti Money Laundering) is a broader concept, encompassing the entire anti-money laundering management process that financial companies must implement.

KYC is an indispensable part of AML. In other words, KYC is a subset of AML. What is KYC in the context of AML - it is the initial identity verification step that prepares for more comprehensive anti-money laundering procedures.

Organizations Using KYC

Today, KYC has become a standard in many financial sectors:

• Banking
• Credit unions
• Asset management companies
• Brokerage firms
• Fintech platforms (Fintech)
• Private lending platforms
• Cryptocurrency exchanges

Conclusion

What is KYC no longer remains a difficult question to answer. It is an essential process in the digital age, especially in finance and cryptocurrency transactions. Properly implementing the KYC process not only helps organizations comply with legal requirements but also protects customers from potential risks such as fraud, money laundering, and identity theft.

As blockchain technology and cryptocurrencies continue to develop, understanding the importance of KYC will help you conduct online financial transactions more safely and confidently.