KYC in Digital Finance: Why Do Exchanges Emphasize This Issue?

If you have ever registered an account on any cryptocurrency exchange, you have certainly heard the term “KYC.” But what exactly is KYC? Why do most modern trading platforms require you to go through this process before you can start trading? Today, we will answer these questions in detail.

What Is KYC? Basic Concept

KYC stands for Know Your Customer. This is not a new concept; it has been widely applied in the traditional banking industry for decades. However, with the explosion of cryptocurrencies and digital financial platforms, KYC has become an indispensable requirement.

The essence of KYC is the process by which financial institutions verify identity, assess risk profiles, and understand the purpose of a customer’s transactions. Through KYC, organizations can gather basic information such as full name, date of birth, address, ID number, driver’s license, or passport.

eKYC (electronic Know Your Customer) is the modern version of KYC, conducted entirely online. Instead of visiting a bank branch in person, you can complete the entire verification process via a mobile app or website within a few minutes.

Why Is KYC Important?

On the surface, the KYC process may seem cumbersome and time-consuming. But in reality, it serves as a crucial shield protecting both financial institutions and yourself.

Counteracting financial crimes: In 2017, nearly 17 million people in the US alone were affected by identity theft, with damages reaching $16.8 billion. Attackers exploit lack of oversight to open fake accounts and carry out illegal transactions. KYC helps prevent these situations from occurring at the outset.

Anti-money laundering: This is one of the main objectives of KYC. By knowing exactly who the customer is, financial organizations can detect fraudulent activities or unusual cash flows from illegal activities such as smuggling, human trafficking, or drug trafficking.

Protecting the financial system: Ransomware attacks in 2021 demonstrated the dangers of inadequate controls. Users were blocked from access and demanded to pay in cryptocurrency to recover data, causing losses of up to $350 million for victims.

How Does the KYC Process Work?

The KYC process is not a one-time check but a continuous cycle. It is usually divided into three main stages:

Stage 1: CIP (Customer Identification Program) - Customer Identification

This is the first and most important step. Exchanges or banks will collect basic personal information such as full name, date of birth, and permanent address. You will need to provide supporting documents like ID card, passport, or driver’s license.

Stage 2: CDD (Customer Due Diligence) - Customer Background Check

After successfully verifying identity, the organization will conduct a deeper check. This stage is divided into three levels:

• SDD (Simplified Due Diligence): Applied to low-risk customers
• CDD (Basic Customer Due Diligence): Standard check for most customers
• EDD (Enhanced Due Diligence): More detailed check for high-risk customers or large transactions

Stage 3: Continuous Monitoring

The work does not end once the account is opened. Financial organizations must establish ongoing monitoring systems to track unusual activities such as:

• Transactions with sudden value spikes
• Cross-border activities or sudden location changes
• Payment methods or receipt of funds inconsistent with customer profiles

Difference Between KYC and AML

Many people often confuse KYC and AML (Anti Money Laundering). However, these concepts are not exactly the same.

AML is a comprehensive legal framework to prevent money laundering and terrorist financing. It includes a range of rules, procedures, and tools.

KYC is just a part of the AML system. It focuses on verifying identity and collecting customer information. In other words, KYC is the foundation upon which the entire anti-money laundering strategy is built.

Their relationship is like that between a component and the entire system.

Which Organizations Need to Implement KYC?

KYC is not only applicable to cryptocurrency exchanges. Most financial organizations must comply with this process:

• Commercial banks
• Credit unions
• Asset management companies
• Securities brokerage firms
• Fintech platforms and lending apps
• Cryptocurrency exchanges
• Payment service providers

In fact, governments in most countries require financial institutions to perform mandatory KYC. This is part of global measures to enhance financial security and combat crime.

Why Is KYC Necessary for Cryptocurrency?

Why do cryptocurrency exchanges need KYC? The main reason is to increase trustworthiness and legitimacy in the crypto industry.

Previously, cryptocurrencies were associated with money laundering and cybercrime. By strictly adhering to KYC, exchanges can demonstrate that they operate responsibly. This helps build trust with regulatory agencies, institutional investors, and the public.

When negative behaviors are effectively prevented, cryptocurrencies are viewed as legitimate financial assets worth investing in, rather than just tools for illegal activities.

Conclusion

What is KYC? Simply put, it is the key that unlocks the world of digital financial transactions safely and responsibly. The process may seem complex, but it is necessary to protect both you and the global financial system.

If you want to participate in the world of cryptocurrencies or online trading, consider KYC not as a barrier, but as armor that shields you from hidden dangers.