What Is Know Your Customer (KYC) and Is It Mandatory in Crypto?

What Is KYC (Know Your Customer)?

KYC stands for “Know Your Customer” and is a process that regulated financial institutions, crypto platforms, exchanges and brokers use to verify the identity of their customers. KYC is a legal requirement in Europe and plays a very important role in assisting on the prevention of financial crimes, such as money laundering, fraud and the financing of terrorism (often referred to as CTF, for “Counter-Terrorism Financing”).

Understandably so, many people find it uncomfortable to share their identity document as you do not simply entrust your personal information to just anyone. However, KYC remains a key mandatory step for financial institutions, including crypto exchanges, to specifically protect yourself and others. If you wish to open an account with regulated crypto platforms, exchanges or brokers, you will always be prompted to go through the KYC process. This process ultimately prevents identity theft as, thanks to advanced technology systems, no one can pretend to be you, thus allowing the platforms and the sector as a whole to operate safely and reliably for everyone.

Key Takeaways

• KYC is a legal requirement for financial institutions, including crypto-asset service providers (CASPs) like Finst, which helps prevent others from misusing your identity.
• During the KYC process, you fill in some personal information, such as your name and address, and you upload an identity document which is used to confirm that you are the person you claim to be.
• Your information is only used for legally required checks and is not accessed or shared without strict purpose.
• CASPs are required to store and secure your information safely in accordance with strict data and privacy regulations.
• With the help of the information obtained through KYC, platforms are able to identify suspicious activities more quickly, providing users with extra protection against fraud.
• For regular users, KYC does not change how you buy, sell or hold crypto, and once your identity is verified you can use the platform as usual within a more secure and regulated environment.

Why Does KYC Exist and Is It Mandatory?

KYC exists to help prevent financial services from being misused for illegal activities such as money laundering, fraud or the financing of terrorism. In the Netherlands, the Anti Money Laundering and Anti-Terrorist Financing Act (Wwft) requires financial institutions to verify the identity of their customers. This applies not only to crypto-asset service providers, but also to banks, payment institutions, insurers and other financial service providers.

Supervisory authorities, such as De Nederlandsche Bank (DNB) and, in Finst’s case, the Dutch Authority for the Financial Markets (AFM), monitor whether entities comply with these laws and regulations. We understand that sharing an identity document does not always feel pleasant. However, this is a legally required step within the financial sector, so that services can be used more safely and potential abuse or misuse can be detected and prevented.

How Does the KYC Process Work?

The KYC process is similar to creating a regular online account, but instead of only providing an email address and password, users are required to submit additional personal information to verify their identity, to confirm that you truly are who you say you are. Users are required to fill in personal information such as first and last name(s), residential address and date of birth. Furthermore, to verify the provided information, users must upload a valid identity document such as a passport, driver's license or ID card. In most cases, this verification is performed automatically and in a matter of seconds, for example through biometric technology such as facial recognition. Additionally, you may be asked for information about your income, the source of your funds or the purpose for which you want to use your account.

KYC and Cryptocurrencies

Due to pre-existing and new European regulations, such as MiCAR, crypto-asset service providers (CASPs) are required to know exactly who their customers are, just like banks have done for years. This means that your identity is verified when you create an account, but your information is only accessed and used when there is a requirement to do so, for example to investigate potential unusual and/or suspicious transactions.

For most users, this means that daily usage remains unchanged, while the platform is better equipped to detect fraud, prevent misuse and intervene quickly when unusual and/or suspicious activity occurs. Decentralized applications (dApps) and peer-to-peer (P2P) protocols do not fall under this obligation because there is no central intermediary involved that facilitates transactions or holds customer funds. However, when you use funds from your bank account to buy crypto, that bank must perform KYC and, potentially, further due diligence. As a result, fully anonymous trading is becoming less common. For most users this is not an issue, but platforms that do not perform KYC usually fall outside regulatory oversight, meaning there is no supervising authority or guaranteed consumer protection if something goes wrong.

Can You Buy Crypto Without KYC?

Regulated CASPs, exchanges and brokers in the Netherlands and in Europe are required to perform KYC, but there are still foreign platforms or smaller exchanges that are not required to do so. As these usually fall outside European laws and regulations and therefore offer less overall consumer protection. Consequences of platforms which do not perform KYC are, for example, the uncertainty about where the funds circulating in the platform originate from or the lack of customer support if or when something goes wrong.

Why Is KYC Important for You?

KYC is not only important for companies, but also for you as a user. Thanks to KYC, you benefit from several advantages:

• Your account is protected against identity fraud and/or theft and unauthorized access. In practical terms, this means that no one can register using your information and pretend to be you.
• Criminals are not able to anonymously abuse financial platforms and their services.
• Platforms detect suspicious activities more quickly and subsequent actions are possible more promptly.
• Increased platform reliability because all its users’ identities are verified.
• Companies comply with local and international Anti Money Laundering (AML) laws and regulations.
• A safer and more transparent financial sector because regulators worldwide cooperate to combat financial crime.

Is KYC Safe?

It is understandable that people question whether it is safe to share such sensitive information, especially if you do not know a company well yet. That is why transparency about security and (data) privacy is so important. In a Privacy Policy you can obtain information on exactly which data is collected, how it is stored and used, and which security measures are in place to keep it safe.

How Finst Protects Your Data

At Finst, the security of our customers is a top priority. Personal data and client documentation, such as identity documents, are encrypted, stored and secured with the latest technologies and highest standards. In addition, measures such as two-factor authentication (2FA) and strict access controls are in place. Finst also uses a Proof of Reserves (PoR) model, which transparently demonstrates that customer assets are fully segregated and backed, as mandated by law.

Everything is designed to keep your data safe, and we never access your information without proper legal reason to do so. Furthermore, only employees who strictly need access to a customer’s personal information (for example, for legal reviews or security reasons) can access it, and even then, under strict controls and conditions.

What Is the Difference Between KYC and AML?

AML stands for “Anti-Money Laundering”, and KYC is a part of this broader AML framework. AML encompasses all laws and regulations, processes and technologies used to prevent money laundering and several other forms of financial crimes. KYC is thus the initial step in the process, which is establishing the identity of a user. Once this has been established, other systems (such as transaction and risk monitoring) are used to detect potential unusual or suspicious patterns. These types of advanced software and machine learning have been used by banks throughout the years, and within the crypto sector these technologies are also being developed even further.

Final Thoughts

KYC plays an essential role in the financial sector and ever more so in the crypto market. It ensures that companies know who their customers are and helps prevent financial services from being misused for criminal activities. While the process may feel intimidating and even intrusive for some users, KYC actually creates a safer, more transparent and better regulated environment. Due to ever-evolving legislations and modern verification technologies, KYC will only become more important and crucial in the future.