What To Know About KYC Crypto Rules Before Investing
We explain the meaning of KYC crypto verification, including laws & safety.
- Writer Mitchell Grant
- andEditor Shannon Ullman
- May 17, 2023
- •3 Min Read
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KYC stands for Know Your Customer and as you’ve probably guessed, involves crypto exchanges “knowing” you through various identity checks.
The general outline for KYC has been around since the 1970s. Obviously crypto wasn’t around then, but laws have quickly caught up to crypto trading and exchanges and now, if an exchange wants to operate in most countries, it has to obey KYC crypto rules.
What Is Know Your Customer (KYC) In Crypto?
Know Your Customer rules apply the same to crypto as any other financial institution. The list of requirements and guidelines is, when you consider KYC exists to curb crime, understandably lengthy. Some of the typical requirements include:
- Collecting all customers’ identification documents
- Biometrics (fingerprints, facial scans, etc)
- Document verification. This could be bills or bank statements
All financial institutions—crypto exchanges count—are required to do due diligence on their customers. Ongoing monitoring is expected and is required if the exchanges want to avoid fostering an environment beneficial to money laundering criminal enterprises.
You might think that this lack of privacy goes against the heartbeat of crypto and deregulated finance and you’d be mostly right. However, companies following these rules do so not just to protect themselves, but to stop criminal finance which includes, but is not limited to: human trafficking, weapons dealings, drug exchanges, money laundering, and more.
Anyone interested in an individual country’s KYC rules can check them out at this very handy link on the IRS site.
History Of KYC Requirements For Cryptocurrency
KYC requirements have existed long before crypto was a thing. Back in 1970, the Bank Secrecy Act (BSA) was written into law. The BSA paved the way for other anti-money laundering (AML) laws. Suspicious Activity Reports (SARs) were introduced in 1996, the U.S. Patriot Act in 2001 following 9/11, and a new AML Act was made law in 2021.
But what does it mean for crypto?
Well, crypto is leading the charge when it comes to compliance. Regulatory agencies have historically scrambled to keep up with crypto’s speed, leading to a golden age of theft and money laundering. However, in the past few years, governments have really pressed on the gas, pushing through significant legislation in an effort to combat crime. More on that in a bit.
What Is The KYC Process In Crypto?
The KYC process in crypto is pretty simple:
- Collect user data points. This includes ID, biometrics, and other supporting documents
- Verify that the user is who they say they are. At this stage, any red flags should pop up. These could be known affiliations to criminal orgs, history of criminal activity, etc.
- Continue to monitor the user even after they pass the initial KYC check
How Long Does Crypto KYC Take?
The time required largely depends on the user and exchange. For example, if you were to sign up for an exchange that follows KYC crypto requirements, you will be prompted to upload your ID and probably provide an address of residence. That process takes longer than the verification for many. Once everything is uploaded, a user can expect to wait for a few hours to a few business days.
KYC Crypto Laws
Top 3 US Crypto Laws
- Anti-Money Laundering (AML): AML laws direct financial institutions to follow a series of rules and guidelines designed to combat money laundering and criminal/terrorist financing activities. KYC falls under AML.
- Bank Secrecy Act (BSA): The BSA determines the reporting requirements for banks and other financial institutions. Reporting suspicious activity is not an option, but a hard requirement. Institutions that don’t follow BSA laws are dealt with harshly.
- Suspicious Activity Reports (SARs): While technically under the BSA, SARs deserve their own bullet point as they are the most important active step an exchange can take to ensure they aren’t liable for crypto crime. Crypto KYC checks are the first step, while SARs are done on a regular basis.
Top 3 Global Crypto Laws
- Europe - 6th Anti Money Laundering Directive (6AMLD): The massive European Economic Area (EEA) updates its anti-money laundering legislation perhaps more than anywhere else. The framework is very similar to US AML laws and requires checks, suspicious activity reporting, and increased transparency.
- Canada - Proceeds of Crime and Terrorist Financing Act (PCMLTFA): Canada boasts not only the longest acronym in this article, but an act passed in 2000 that requires the same level of identity checks as the US and Europe, and basically all other first-world nations.
- China - Anti-Money Laundering Law of 2006: Known for taking some liberties with their citizen’s privacy, China follows the West requiring information from financial institutions relating to identity and suspicious activity.
Can You Buy Crypto Without KYC?
You can absolutely buy crypto without KYC. You’ll lose a ton of protection and you might end up trading crypto on an exchange that lacks liquidity as the largest exchanges are obeying KYC guidelines. Typically, these exchanges don’t play nicely with regulators and while that may more closely adhere to the spirit of decentralization, it also means tracking stolen funds is much harder.
This might indicate you’re trading on a platform with a much higher concentration of criminal activity. Such exchanges are all too frequently sanctioned or shuttered as a result of large-scale fraud or money laundering activity.
Is Crypto KYC Safe?
Know Your Customer crypto regulations increase the safety of those trading crypto, albeit at a loss of absolute anonymity. Almost all of the largest exchanges follow KYC guidelines because it keeps them safe from criminals gunking up their business and also promotes them as a more legit place to trade crypto.
Yes, your ID is verified. However, these checks were designed to prevent crime, and that means wallet theft as well as terrorism finance. Short answer—KYC crypto rules make the ecosystem safer for both exchanges and users.
Mitchell Grant has been working with both small businesses and Fortune 100 companies—such as Citigroup and Investopedia—for years. A prolific writer, his work is read hundreds of thousands of times per day.
Shannon Ullman is the managing editor for Milk Road. She specializes in cryptocurrency and personal finance content. Her work has appeared in publications like Insider Inc.
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