KYC and ID requirements for Crypto

The majority of cryptocurrency exchanges and trading platforms require proof of identity. This is especially the case if you are wishing to deposit fiat currency and transfer into crypto. As this process is normally conducted via credit or debit card purchase, it is unlikely that you will find a platform that will allow you to buy crypto without going through a formal identification and verification (ID&V) process. Even if you do, by purchasing crypto with a credit card, you are still conducting a transaction that is linked to your identity.

As the crypto industry comes under increasing scrutiny from a governance perspective and as the coverage of regulation expands, crypto service providers have responded in line with the enhanced requirements. Exchanges recognise the value and importance of regulation across the market and the need to comply with the laws by which they are governed, in the jurisdictions in which they operate.

All major countries have their own laws governing KYC, AML and the prevention of financial crime and terrorist financing. All regulated financial institutions are required to comply with these laws and standards.

Whilst it is possible to buy certain cryptocurrencies (such as Bitcoin and Ethereum) in the over-the-counter (OTC) market, the majority of prospective buyers and investors need an exchange, especially if they wish to buy other altcoins. Exchanges are a central component of the crypto-economic system for the market to operate and for investors to participate.

For obvious reasons, regulators have concentrated their oversight focus on exchanges, seeking to ensure that these exchanges operate with the highest standards of security, resilience and compliance. In particular, that exchanges follow best practice in regard to measures surrounding Know Your Customer (KYC), Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT).

‘Know Your Customer’ is a term describing international standards and regulations followed to onboard new customers when opening accounts at banks or exchanges. The process encompasses a financial institution’s obligations to verify the identity of a customer in line with global anti-money laundering and anti-financial crime laws. KYC is part of the identification and verification checking required to open an account.

Anti-Money Laundering (AML) measures encompass the mandatory laws, regulations and procedures that have been instituted internationally to combat illicit financing and specifically the practice of money laundering. AML laws require banks and companies handling money to identify and report any suspect illegal activities, such as money laundering, financial crime and the funding of terrorism. Penalties and fines for financial institutions that do not follow KYC and AML laws are punitive, so banks and financial companies take this compliance responsibility very seriously. Illegal activities being targeted include the placement, layering and integration of illegally sourced funds; tax evasion; trade in illicit goods and the misappropriation of public funds, to name but a few. AML regulations require regulated financial institutions to conduct appropriate due diligence on customers to detect and prevent illicit practices.KYC requirements for crypto wallets and exchanges.

In most countries globally, identity (ID) verification is required to comply with KYC and AML regulations. Cryptocurrency exchanges domiciled in the US and UK for example, cannot operate without verifying every customer. However not all jurisdictions around the world require cryptocurrency exchanges to conduct KYC. This is beneficial for investors seeking anonymity, however these exchanges are unlikely to support fiat deposits, so those investors seeking to remain anonymous will still need a fiat on-ramp. Fiat deposits and withdrawals almost always require KYC.

As with opening a bank account, crypto exchanges complying with KYC rules require that new customers provide personal information for their identity to be verified. In the majority of jurisdictions, KYC verification will require you to provide official, government issued identity documents such as your passport or driving license. It is also highly likely that you will be requested to provide proof of address, for example a recent utility bill sent to your home address. Most crypto exchanges will not allow users to deposit fiat currency funds or transact across the exchange until identity has been verified.

Whether you are in favour or not, increased regulation is sweeping across the crypto industry at a rate of knots.

In the UK, the FCA has now taken over responsibility as the AML and Counter-Terrorist Financing (CTF) supervisor. Going forward, all U.K. based crypto companies are required to register with the FCA, who will ensure that all U.K. crypto firms adhere to AML/CTF policies, including the EU's 5AMLD and the amended Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017.

In the US, all established crypto exchanges should already be meeting the requirements for KYC/AML compliance in line with the rules as a registered Money Service Business with FinCEN.

Outside of the US and UK, larger exchanges appear to be rolling out KYC/AML compliant procedures to ensure they can retain market share in an increasingly regulated environment, notably as a result of the FATF’s new Travel Rule. The Financial Action Task Force (FATF) recently introduced the ‘Travel Rule’ — a requirement forcing member nation crypto firms to disclose customer information on transfers over $1,000. Conversely, smaller exchanges lacking the financial backing and infrastructure to comply, will find it difficult to keep pace and therefore to compete.