The Know Your Client or Know Your Customer (KYC) standard in the cryptocurrency spectrum ensures that financial institutions (FIs), businesses, and crypto service providers (sometimes known as VASPs or Virtual Asset Service Providers) identify their customers and understand the nature of the business in which their customers are active and involved.
Since cryptocurrency exchange service providers are regulated, they have the obligation to conduct KYC processes and include their KYC policies into their AML (Anti Money-Laundering) compliance programs.
In Europe, the fourth version of the Anti-Money Laundering (AMLD4) directive was enforced by law in June 2017 with a new set of rules. The new enhanced version of the fifth AML directive (AMLD5) has been in effect as of January 10, 2020, which ultimately brought new challenges for financial institutions and, subsequently, for crypto exchanges with regards to their KYC.
EU member states were obligated to implement the directive within two years.
To comply with international regulations such as FATF (Financial Action Task Force) recommendations, against money laundering and terrorist financing (TF), crypto businesses should adopt a risk-based approach to KYC procedures. Such procedures need to be implemented in the first stage of any business relationship when onboarding a new customer.
KYC refers to the processes that cryptocurrency exchanges must go through to:
An effective KYC protects both crypto businesses from high costs of compliance penalties and reputational damage as well as the individual customers to not get harmed by any illegal activity whilst assets are protected.
A layered approach to customer onboarding implies that you might not need to gather every available KYC piece of data for every customer right away. Instead, a layered approach is more subtle.
Layered KYC client onboarding means collecting enough information to enable onboarding and the customer to start transacting without unnecessary friction.
This risk-based approach considers factors such as:
Partner onboarding involves providing the necessary support and information to new partners so that they can integrate your KYC program smoothly and start using it.
The partner onboarding process can include portal access, comprehensive product training, guiding partners through available regulatory frameworks, AML rules and resources, and more.
This KYC procedure should include a digital process that verifies an identity document as genuine or even authenticates the document holder through additional biometric checks such as facial or fingerprint checks.
A digital ID verification process enables financial institutions and crypto exchanges to automatically capture customer demographic data, which can be integrated into enterprise systems like CRM to:
Financial institutions and exchanges must maintain records on transactions and Information obtained through the Customer Due Diligence measures. These requirements should apply to all new and existing customers based on materiality and risk.
Cryptocurrency trading apps are undoubtedly the area where facial recognition can be expected. KYC onboarding with facial recognition online is a new hot topic. The COVID-19 pandemic made us all rely heavily on digital channels and apps. Face recognition technology combines facial feature biometrics. It can be used with identification documents to confirm that the person submitting Information matches the provided identification document. Face
Recognition is considered to be more user-friendly and has been shown to have high verification rates in criminal investigations. It’s worth noting that 64% of primary checking accounts opened were done online in Q2 2020 in the United States alone, indicating the trend.
increased mobile app usage urges businesses to focus on mobile-first and develop fully mobile user-friendly onboarding experiences. During the identification process (a selfie) is required. The software provides a liveness detection feature to avoid spoofing attacks using a static image. Liveness detection proves that the photograph taken comes from a live person.
Financial institutions are investing in digital onboarding, including video KYC (video identification), and leverage biometrics through online and mobile channels to adapt to current customer preferences.
Considering the global and cross-border nature of crypto businesses and those operating with crypto, an online option for KYC verification is vital, is facial recognition the way to go or is there another option?
In the next phase of the decentralized economy, having a crypto AML compliance analytics solution – to power your KYC procedures and meet global and regional regulatory requirements – will be critical. Innovation is boundless, but new blockchains and coins coming into the sector must comply or they won’t be given a space in the next-gen financial industry.
Crystal Blockchain powers a risk-based blockchain transaction readability approach to ensure compliance for crypto businesses and VASPs. Ensure clarity for risk levels associated with transactions on your blockchain & with your smart tokens.
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