KYC, or "Know Your Customer," is a policy and process that is used to identify and verify the identity of customers, predominantly in financial and banking sectors. Compliance with KYC is imperative in order to prevent identity theft, fraud, money laundering, and terrorist funding. KYC makes a company aware of who their customer is by verifying their identity and assessing potential risks.
The KYC verification process typically involves the following steps:
- Customer Identification Program (CIP): The first step is to verify the identity of all customers by obtaining information such as name, date of birth, address, and a government-issued identification document like a passport or driver's license.
- Customer Due Diligence (CDD): CDD involves vetting the customer's background and potential risk factors by scrutinizing transaction patterns, occupation, and home country1. In the case of higher-risk clients, financial institutions can employ Enhanced Due Diligence (EDD) to garner more information and report suspicious activities.
- Continuing Monitoring: The banks and other financial institutions continuously monitor the transactions to detect suspicious or unusual activities1. The customer profiles are updated for any change, such as a change of address or job, to keep monitoring client risk.
How Does KYC Function With Crypto?
Crypto KYC checks are not different from the process for typical financial institutions. Regulations are put in place by government regulators and must be adhered to depending on the geographical location of the crypto exchange.
In simple practice, cryptocurrency KYC will need to verify the user's:
- full name
- residential address
- date of birth
- ID document confirming the above
These will be done manually, but likely to be automated using KYC software, which can offer a risk-based approach as well as identity verification functionality.
Since crypto exchanges are also needed to put in place anti-money laundering controls, it is also worth including KYC and AML screening, which entails PEP screening, sanction screening, and adverse media screening.
Note how some crypto exchanges also have to keep users under surveillance on an ongoing basis, for instance via the application of transaction monitoring
What are the benefits of Crypto KYC?
Despite operational adjustments and difficulties associated with the enforcement of KYC standards, cryptocurrency exchanges benefit much from regulatory compliance due to the following reasons:
Enhanced transparency and customer confidence
Verification of user identity is beneficial to transparency and customer confidence. When customers are confident that their cryptocurrency exchange is taking proactive and preventive measures to protect their accounts, they are likely to remain with the service.
Fewer scams and money laundering
Between January 1, 2021, and March 31, 2022, more than 46,000 customers lost more than $1 billion of their cryptocurrency to scammers. (Fletcher 2022) Thorough identity checks would limit bad behavior and build market reputation significantly.
Reduced legal risk
As legal regulations evolve, robust KYC processes will remain in the lead. KYC practices enable VASPs to circumvent/avoid cases of fictitious identities, prevent money laundering, and assess customer risk by requesting government-issued identification and ascertaining financial history and assets. Such measures enable firms to reduce legal and regulatory risk, providing time to focus on optimizing conversion rates, accelerating transactions, and remaining compliant.
Greater market stability
he market of digital currency is notoriously volatile on account of anonymous, suspicious transactions. KYC measures involving enhanced identity verification make the market overall more stable and support value appreciation.
KYC in Crypto Casinos
I am going to be frank here and say I don't think most crypto casinos would be eager to have KYC. It's not easy to implement and it consumes too much time on all parties involved. But frankly, the point is not actually up for discussion.
The amount of KYC requirements per license varies but because most top-rated casinos hold Curaçao licenses, we will consider them.
Any casino licensed by Curaçao must also comply with the Regulations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) from the Curaçao Gaming Control Board.
Some of the following crypto gambling platform casino KYC rules and policies that your favorite online gambling sites need to contend with are as follows:
- Player identification. Online casinos should maintain KYC practices to verify their players. It includes gathering and verifying official documents of identification, such as passports or driver's licenses.
- Due diligence enhanced. More stringent checks and ongoing monitoring must be applied to high-rollers who place higher transactions.
- Record keeping. Online casinos must keep a detailed record of player activity (and KYC documents) for a long duration of time. These records shall be made accessible at any given point in time to regulatory agencies – on demand, of course.
- Reporting suspicious transaction. Casinos shall report suspicious player activity or player behavior to corresponding authorities. They also have the right to lock your account and withhold payout in this regard.
- Staff training. Likewise, casino staff must receive adequate training on AML regulations and procedures, so they can successfully identify and report any suspicious player activity.
- Customer awareness. Casinos must educate players about responsible gambling and problem gambling behavior. You’ll usually find such information in the FAQ sections in the site footer.
What are the benefits of Crypto KYC?
Despite operational modifications and complexities that arise when implementing KYC guidelines, cryptocurrency exchanges gain much benefit from adherence to the following reasons:
Greater transparency and trust among customers
Verification of users' identities is beneficial to transparency and trust among customers. Since the users know that their cryptocurrency exchange is taking extra effort and deploying precautionary measures to secure their accounts, they are likely to continue using the service.
Fewer scams and money laundering
Between March 31, 2022, and January 1, 2021, more than 46,000 consumers had lost more than $1 billion in crypto to scammers. (Fletcher 2022) Strong identity verification can significantly reduce fraud and improve market reputation.
Reduced legal risk
With evolving legal requirements, robust KYC processes will remain in the lead. KYC procedures enable VASPs to prevent/limit cases of fake identities, prevent money laundering, and assess customer risk by requiring government-issued identification and ascertaining financial history and assets. These actions help firms reduce legal and regulatory risk, enabling time to focus on optimizing conversion rates, accelerating transactions, and staying compliant.
Increased market stability
The cryptocurrency market is famous for being unstable as a result of illicit, anonymous transactions. KYC mechanisms with additional checks on identity contribute to the stability and worth of the market in general.
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