The terms KYC and AML, often combined together, have become commonplace in the crypto industry, to the point that no one questions them anymore.
However, complying with these standards and legal constraints is not an approach without challenges, whether one is a start-up organizing an ICO, an exchange or even a simple consumer of crypto services.
From the origin and the particularities of these two guardians of the temple of regulation, to the security issues in terms of personal data, passing through the exoticism of certain practices, we go around the question.
KYC and AML, standards from banking and insurance
Application of standards KYC (“Know Your Customer”, and AML (“Anti-Money laundering”) comes straight from the world of finance and of insurance American. More specifically, the application of KYC / AML follows many drifts (that then) observed in these sectors in the years 1990-2000.
KYC and AML were conceptualized and pushed by the FATF, Financial Action Group which was founded in the 90s literally in response to the explosion in money laundering volumes. After to the 2001 attacks, the FATF then broadened the spectrum of its action to include fight against terrorist financing.
What are the KYC / AML standards for? What are the differences between KYC and AML?
The KYC procedure allows:
- to make surereal identity individuals who subscribe to a financial service,
- by demanding that they bring a proof of it,
- most often by communication of identity and domiciliation documents,
- it applies to the opening of a service.
The AML standard:
- Is applicable much wider that the only KYC,
- is made up of a wide range of obligations with which organizations managing cash flows must comply.
Illustrations of AML constraints
The KYC approach concerns the user at the time of the opening of the service. It is a procedure, most often unique and relatively quick, materialized by a positive act of transmission of official documents. The banking establishment carries out verifications which will enable it to cover itself in the event of subsequent difficulties: the bank has made a reasonable effort to verify as effectively as possible the real identity of its new user.
AML regulations are much broader, and applies to all financial movements and flows, without the slightest limit of time and space. In order to allow a more effective fight against money laundering and the financing of illegal activities, the AML imposes on financial institutions numerous operating constraints, for example:
- declaration and tracking of all operations exceeding 10,000 dollars,
- holdback period during 5 working days before transfer.
As you will have understood, the idea is to make suspicious financial movements more complicated, by allowing regulators and investigators sufficient intervention time to interrupt a suspicious money laundering process or transfer of liquidity.
KYC and AML applied to the crypto industry. Warning on personal and financial data.
To say that regulators were taken aback by Cryptoactive fundraising fever between 2016 and 2018.
However, as exotic as these new products were, their financial nature quickly became clear! Thus, KYC / AML standards have been imposed on all operations of ICO (Initial Coin Offering, an issue of tokens following a fundraising in cryptocurrencies).
Formally, little difference with existing practices … Except that rather than entrusting your documents and personal info to banks or insurance companies with a storefront, it is to newly created crypto start-ups to which you were then encouraged to communicate your data, in a logic of “Compliance / financial compliance”.
We know the following: 95% of ICOs at the time did not work. In the best of cases, the businesses failed, in the worst, they were outright scams.
However, if the crooks were stuffed at the time of easy money, they had often also taken advantage of it to constitute another war treasure : very valuable combinations of identity documents with photos + direct debit, or even bank information. Without even counting the combination of these elements with digital data (email address, social networks, IP addresses, etc.). In short, gold bar, the quality of one who trades dearly on the dark web!
Vigilance must therefore be exercised when complying with KYC / AML requirements: do your research BEFORE throwing HD copies of your passport and invoices at anyone!
KYC and crypto investment
The two most frequent situations in which you will be asked to comply with a KYC type step will be:
- Investing in a ICO,
- registration on a exchange platform allowing the purchase or trading of crypto assets (such as Binance or Coinbase)
Conventional requests will most often involve transmission:
- of a scan of official identity document,
- of a proof of domiciliation (telephone bill, electricity bill),
- of a user selfie proudly brandishing the document, often accompanied by a paper bearing the current date.
Besides the traditional successive failures (those who have already attempted the adventure know the delights of the blurred and poorly framed selfie, in the absence of a third hand with an available opposable thumb …), the procedure will generally end in a few hours / days in most cases.
On occasion, KYC procedures will be more amazing. So the exchange Liquid is currently asking to validate the KYC step, a video chat for a few moments. This quick exchange (in basic English) gives an opportunity for one of the team members to take an image capture, accompanied by the official identity document!
Go through a KYC stage and thus entrust your personal information to a third party, comply with AML regulations … These constraints place you light years away from the initial ambitions of anonymity and independence promised by blockchain and cryptocurrencies.
However, it is difficult if not impossible today to get rid of these stages. Just make sure you only impose them on yourself wisely, and never without having done a minimum of pre-verification.
Nice to meet you, it’s Hellmouth! Editor-in-chief of Bitcoin, the crypto media you are honoring to survey right now (well done, you have taste).
Crypto-enthusiast of the second hour, nothing is more important to me than supporting the global adoption and democratization of the treasures that the blockchain offers us.
I write articles between two cocktails in Tahiti, my adopted island, and do not hesitate, if the opportunity arises, to feast on a plump scam or a little too enterprising Ponzi pyramid.
Did you not like the article? Do you want to give me your opinion on a subject, or offer me one? You can come and bawl like a polecat or pour out on my LinkedIn profile, on Facebook, or Bitcointalk