How crucial are AML and KYC for Crypto Exchanges?


What is AML?

AML stands for Anti-money Laundering. It is a  framework that comes with procedures and regulations that govern activities like tax evasion, illegal goods trading, transfer of funds and such. Regulatory bodies implement AML activities in such a way that they require financial institutions to be aware of who their customers are (thereby KYC). This is done through due diligence and if there are suspicious transactions coming from their customers, they should report them.

Are there crypto exchanges known for money laundering?

Money laundering activities can be rampant in any crypto exchange and can at times go undetected. However, crypto gambling sites like Coinmixer, Chipmixer and Darklauncher have often been named although they are not known to condone such activities. While some of such activities are carried out through the platforms, a lot has also been reported in the Darkweb.

What is KYC?

KYC is short for Know Your Customer. As the name implies, it is the situation where service providers know who they are dealing with when it comes to their customers. in the AML process, KYC is the stage where due diligence is carried out.

KYC takes place at the start of the business relationship when a new customer joins the financial institution where a risk value is assigned to that customer. This is usually based on the propensity for financial crime activities that the customer could be subjected to.

How is KYC carried out?

In most cases, the KYC process involves collecting and verification of the user. This is where the customer’s PII or Personal Identifiable Information is collected. It should involve the full name, date of birth, address and a personal identification number (like an identity card) which is official government-issued documentation. The financial institution must then verify it against any official database to ensure that the customer is ‘clean’.

Is it crucial for crypto exchanges to have AML/KYC procedures?

With the transparency and ease of fund transfer on crypto exchanges, it is a must to install AML programs. This is due to 2 main reasons.

Besides KYC, other programs that might be useful in this area includes:

  • CAP – Customer Acceptance Policy – This is the process to identify new customers who will provide their official documentation
  • CIP – Customer Identification Program – This refers to the process where the documentation provided by the customer is verified.
  • Transactions Monitoring – This is the process where the exchange put in place monitoring engines that checks transactions that are carried out in the platforms. The idea is to flag suspicious activities when they occur and then report them for further monitoring.

How are KYC processes practiced on crypto exchanges?

In most cases, the customer would only need to provide their legal name and information when registering with the crypto exchange although different exchanges have their own set of procedures. For instance, Coinbase users are required to register using their full name and email address. When they wish to buy or sell their crypto, then they must go through the proper KYC procedure. This includes submitting the official documents and providing other details. One thing to note about Coinbase is that they use a digital ID feature where verification and authentication use biometric facial recognition.

Bitfinex users who are using crypto fully are not required to complete the KYC procedures but they need to verify themselves when trading using fiat currency. It is also reported that there are less stringent processes among Binance users. Through the platform, users are able to withdraw up to 2 BTC each day without the need for KYC or verification although some cases have differed. In the US, however, Binance users have to go through a full KYC process.

As understood, there are crypto-to-crypto exchanges that do not require much KYC. This is seen in HitBTC and Huobi Global. The latter however requires users to verify themselves if they intend to withdraw higher amounts of crypto.

What is the vulnerability concern with cryptocurrency?

One of the biggest concerns when it comes to cryptocurrency is money laundering. This is not a new problem as money launderers have used all sorts of creative means in the past. Cryptocurrency has become a major platform for such criminals because as they are cheaper and provided faster international transactions.

What has been done to curb money launderers using cryptocurrency?

Most governments implemented AML or anti-money laundering laws to stop these crimes. In recent years, they have extended the legislation to cover cryptocurrency exchanges and their related services. One of the most effective methods to do this is through the KYC or Know-Your-Customer program.

So, how crucial is AML and KYC to crypto exchanges?

There is no denying the impact of cryptocurrency is changing the financial industry and money markets. This is most evident in how transactions are carried out. With crypto, the international monetary exchange has also been impacted, bringing it some new issues that need to be addressed. This is seen through initiatives like the FinCEN Final Rule in the USA and the AMLD5 (Fifth Anti-money Laundering Directive) implemented in Europe. With such regulations, the exchanges come under the legislation of anti-money laundering laws.

There are different procedures in AMLD5 required among fiat-to-crypto exchanges and crypto-to-crypto exchanges. The former requires the exchanges to use KYC processes while the latter does not. As for the FinCEN Final Rule, all crypto-related exchanges are required to implement KYC processes.

Are crypto exchanges doing enough?

To date (August 2021), crypto exchanges have yet to be fully compliant with AML policies. In a recent study involving more than 200 crypto exchanges, nearly 70% of them still do not have proper procedures. With KYC, it gives customers a certain sense of security that they are trading with legitimate parties. This is extremely crucial in light of the many hacks and frauds that have taken place over cryptocurrency exchanges and blockchains in recent years.

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Six Capital Pte Ltd. Singapore

The financial world since 2008 and the Global Financial Crisis has changed forever. In the currency markets, the banks’ role as ‘market makers’ has diminished

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