Glossary

The words of Crypto by the Bitsapiens team.

KYC – (Know Your Customer)

Know Your Customer (KYC)

KYC, or Know Your Customer, is a procedure employed by banks and financial institutions to collect personal data and contact information from existing and potential customers. Its primary objective is to prevent fraudulent activities, money laundering, and the misuse of financial accounts.

In the United States, banks are legally obligated to implement KYC practices in accordance with the 2001 USA Patriot Act. On an international scale, the Financial Action Task Force (FATF) was established in 1989 to combat money laundering. The FATF sets standards and offers recommendations for Anti-Money Laundering (AML) practices. Member countries and jurisdictions enforce diverse laws, rules, and regulations in alignment with these AML guidelines. KYC and AML work together to safeguard against dishonest and criminal financial behavior.

Typically, KYC procedures commence before an individual becomes a customer. Financial institutions must first verify the identity of potential customers before opening an account. As there are no standardized verification criteria, this process may vary across different banks.

Some of the commonly required identification documents for KYC processes include:

  • Driver’s License or Government-issued photo ID
  • Passport
  • Social Security number
  • PAN card (Permanent Account Number)
  • Voter ID Card

Address verification is also essential, and applicants may submit various supporting documents based on the bank’s requirements. Examples include utility bills, account statements from other banks or credit card issuers, or lease agreements.

Once a customer is provided with an account, banks are obligated to conduct periodic record updates. This involves “recertifying” customers by periodically requesting KYC information throughout the banking relationship. Banks also assign risk levels to customers and monitor their transactions to ensure they align with expected behavior.

KYC practices extend beyond banking institutions. The financial investment industry follows KYC processes in compliance with the Financial Industry Regulatory Authority (FINRA) KYC Rule 2090. Unlike AML efforts, these KYC practices aid investment companies in better understanding client needs.

In the realm of cryptocurrency exchanges, users can often create accounts before completing the KYC process. However, these non-verified accounts come with limited functionalities.

The clear advantage of KYC practices is the reduction and prevention of money laundering and financial fraud. While it adds complexity and time requirements, especially for the banking industry and its customers, the benefits outweigh the inconvenience. Standardized practices would likely help streamline the process.

Within the cryptocurrency sphere, the use of digital currency for illicit activities has drawn significant attention. Reducing such activities is undoubtedly beneficial for the reputation of cryptocurrencies. Compliance with KYC is time-consuming but should always be encouraged. However, users should exercise caution and only provide sensitive identifying information after ensuring that the company implements necessary security standards to protect their data.