WHAT YOU SHOULD KNOW ABOUT KYC

WHAT YOU SHOULD KNOW ABOUT KYC

By Heyoan | www.publish0x.com/heyoan | 14 Oct 2021


 As recently as 5 or 6 years ago, few people knew what cryptocurrencies were and how blockchain technology worked. Cryptocurrencies were unregulated, so you could maintain complete privacy and enjoy anonymity. Little of it. Many investors believed that the cryptocurrency industry could become a springboard to riches. This was fostered by the lack of proper regulations, and lack of understanding of blockchain technology, by financial regulators around the world. Today, almost everyone has heard of cryptocurrencies, and regulators want the cryptocurrency market to become at least partially regulated.

    WHAT DOES KYC MEAN FOR THE AVERAGE CRYPTOCURRENCY FAN?                                 

Well, it means that buying/selling cryptocurrencies on the most well-known exchanges increasingly requires going through a process KYC. (However, some exchanges do NOT require users to go through the KYC process. For example KuCoin, Margex, Ftx, Pionex, Bybit, or StealthEX). And what does KYC stand for? Know Your Consumer means, in English, "know your customer". KYC is not new to the financial industry. (For example, to open a bank account, a customer must present an identity document from which their identity can be determined. And only after verifying that the document is not stolen and that John Doe is indeed. John Doe, can a wide range of banking products be used). On the other hand, anyone can register on a cryptocurrency exchange. However, access to many of the exchange's features (such as cryptocurrency withdrawals) is usually limited until you go through the KYC process. In other words, KYC verification is a check to see if a new exchange user is a person they claim to be.                                                                                                                                                                            Thanks to this control, it is possible to immediately exclude from the group of users those who participated in financial embezzlement, laundered money, financed terrorist activities, engaged in identity theft, or took an active part in corruption. It is worth mentioning that the KYC process is usually multi-level (e.g. 4 levels). Level 0, is the lack of execution of KYC procedure by the user. Level 1, basic - is access to all features of the exchange with a small daily limit of cryptocurrency deposits/withdrawals. Level 2, medium - means much higher, daily limits for cryptocurrency deposits and withdrawals. And level 3, the highest - means the ability to deposit and withdraw very large amounts of cryptocurrencies.

   HOW DOES KYC PROCESS, PERCEIVE CRYPTOCURRENCY EXCHANGES?     

   It is worth knowing that cryptocurrency exchanges are divided into two categories. Category one is the fiat-to-crypto exchange. And the second category is the crypto-to-crypto exchange. A fiat-to-crypto exchange allows for the exchange of fiat money (e.g. zloty or dollars for BTC). In other words, such an exchange can be called a GATE through which fiat money passes into the world of cryptocurrencies. This is why such an exchange has to apply a stricter verification procedure for its users. What's more, it is demanded not only by regulators but also by banks. Because banks, want to make sure that they are NOT dealing with people suspected of financial crimes.

Here, the KYC process will consist of four components: (1) identification process (2) acceptance process (3) procedures related to risk management, and (4) monitoring of user transactions. A crypto-to-crypto exchange, on the other hand, only allows you to exchange one cryptocurrency for another (e.g. ETH for XLM). This is why KYC procedures here are sometimes much less stringent, or there may not be any at all. However, the crypto-to-crypto exchange itself acts as an intermediary. Users can exchange one cryptocurrency for another. And then, sell it to realize a profit. And is it worth it to be on such a crypto-to-crypto exchange, where you have to go through the KYC process at least to a minimum extent? Yes.

First, you get a higher withdrawal limit. Secondly, even if such an exchange is hacked and hackers steal digital assets - you can easily prove that you own the account. And most importantly, one will get help and support in recovering cryptocurrencies. In this way, crypto-to-crypto exchanges are building their reputation and also, trust in the overall market. However, it is fiat-to-crypto exchanges that have made many people who were previously skeptical about cryptocurrencies change their minds and start trading. At the same time, the cryptocurrency industry began to be watched more closely by the criminal world. Dishonest investors started committing financial crimes. This in turn caused the heads of many exchanges to change their attitude towards KYC procedures. Most of the exchanges were skeptical or even hostile towards KYC. Everything changed when some of them fell victim to hackers who stole millions of dollars from them. Then it was realized that KYC procedures (to a greater or lesser extent) will sooner or later have to be introduced by all leading cryptocurrency exchanges. For exchanges, KYC procedures are a medal that has two sides. On the one hand, some regulators require compliance with KYC procedures so that exchanges weed out bad investors and eliminate them from the market. And it is hard to argue with this thesis. The problem is that ensuring security in cryptocurrency trading involves higher operating costs. And this results in lower profits for exchanges. Large exchanges will manage, but smaller exchanges are signaling that they will have difficulty maintaining liquidity. And as a result, they may go out of business. Little else. Moving from a basic level of security to a higher level of security means not only higher operating costs. It also means the need to establish close cooperation with a specialized company that will implement special mechanisms tracking transactions in real-time.

Why? Because only such a solution allows you to quickly detect market manipulation and thus, counteract the fraudulent practices of more clever market users. On the other hand, there are ordinary users of the stock exchange. And they would like it to be the same as it was before. That is, that there was full privacy and anonymity. So that it was possible, at least partially, to launder money coming from illegal sources and not to pay taxes. Unfortunately, this approach makes it difficult for exchanges to manage risk, does not increase confidence in the industry as a whole, and almost completely, makes it impossible to protect assets that users keep on the exchange. There's no denying that achieving even a basic level of security in cryptocurrency trading must involve lighter or stricter KYC procedures.

    IS THE PROCEDURE OF GOING THROUGH THE KYC PROCESS COMPLICATED?

No. Typically, a new user will need a scan of a photo ID (e.g. passport, driver's license, or national ID) in JPG, PNG, or PDF format. Also, a scan of a photo of a document confirming your address, e.g. bank statement, gas, or phone bill. And despite appearances, it is not a bureaucracy. Why? Because on the ID card, there is no address of residence. So the exchange does not know where the user lives! There is a PESEL on the ID card, thanks to which government bodies can identify the person. However, the cryptocurrency exchange has no access to the PESEL database. Therefore, it uses the bill to find out the residential address of its client. In addition to this, a selfie can be taken together with an ID card, e.g. using a webcam. And all this to compare the photos. To check if the PHOTO of the face on the ID card is the same as the face in reality. In other words, to check if the new user is not using a stolen ID and if he is the person he claims to be! The verification itself usually takes place quite quickly (up to 24 hours) and once approved, you can start trading. And does the KYC process only happen once? Unfortunately not. You have to go through the KYC verification procedure on every cryptocurrency exchange.

Why? Because the personal information you provide is confidential and for security reasons, is NOT shared with other exchanges. Also, on another exchange, there may be slightly different procedures for going through the KYC process. Well, for some people this can be quite an annoying experience - even more so if they plan to trade on e.g. 3 or 4 exchanges. Nevertheless, it should be treated... like fastening your seatbelt before every car ride.

I invite you to register on Binance: https://accounts.binance.com/pl/register?ref=36243190 where you can go through the KYC process quickly and efficiently. Apart from that, you can not only trade cryptocurrencies on the SPOT market, but that is also on the cash market. You can also, for example, bet on the RISES or DECREASES of various cryptocurrencies on the FUTURES market, which is a market for perpetual contracts. You can also use the FUTURES market for automated trading (grid trading). Link to the FUTURES market here: https://www.binance.com/en/futures
Other interesting features on Binance include P2P trading, stock tokens, battle, NFT Marketplace trading (digital artwork), Vanilla options, leveraged tokens, staking, bnb vault, launchpool, or flexible savings.

    CAN A CYBERCRIMINAL CIRCUMVENT THE KYC PROCESS?

It turns out that yes. Digital assets are steadily gaining popularity and thus, they are becoming a gluttonous morsel for various cybercriminals. One only has to browse through popular online forums to find that many people want to circumvent the KYC process. Why? Because they are minors, or they don't want to pay taxes, or they believe that the crypto industry should remain in the realm of privacy and anonymity. And what are the most popular ways to circumvent KYC?

1. For a stolen ID/driving license and selfie. Criminals forge ID cards, driver's licenses, and selfies and then sell them to people who want to circumvent the KYC process.
2. VPN, or virtual private network. This is a very simple method of circumventing KYC by changing your IP to a country where cryptocurrency regulations are very lenient. This way, for example, minors often get access to exchanges where they want to do their business.
3. On another person. A professional cybercriminal agrees to go through the KYC process using his data /rarely/ or that of a third party /most often/. And then, he gives such a stock market account to a person interested in circumventing the KYC procedure, for a fee.
4. Biometrics. This is the most costly form of fraud. Some exchanges no longer require a simple selfie photo with an ID card (such a photo can be easily faked). What is required is a short video of a live person turning their head - once to the right and once to the left. Scammers can get around this as well. They sell digitally processed videos of rotating heads to interested parties. And the most technologically advanced ones invest money ... in artificially constructed heads (costing 15-20 thousand zlotys) that look like real ones. And all this to deceive the automatic verification of identity.

    WHAT IS THE DIFFERENCE BETWEEN KYC AND AML?

KYC is designed to screen a new exchange user to find out their identity and whether they are "clean". Anti-Money Laundering is a very broad term. It applies to all users of the crypto exchange and means taking all measures to combat money laundering, the concealment of illegally acquired funds, the embezzlement of public funds, the financing of terrorism, combat of contraband or sell drugs, and other financial crimes. And for the exchange this means: conducting constant monitoring of transactions made by users, verifying the origin of large amounts of cryptocurrencies, and reporting any suspicious activity to law enforcement authorities. Every criminal is well aware of the fact that getting money through illegal means is only 50% of success.

To use them and remain above suspicion - they need to be laundered - that is, put into legal circulation. And how does the mechanism of money laundering look like? Most often it consists of three stages.

The first stage - consists in placing the left cash in legal companies and institutions. For example, in several banks, car repair shops, or restaurants owned by criminals, on cryptocurrency exchanges, or online casinos. Stage two - is to perform a series of financial transactions (usually with the help of electronic banking), so that the money is "blurred" and everything looks like ordinary business transactions.

The third stage is to withdraw most of the money from these companies and institutions so that it can be disposed of freely.

There are many strategies for laundering dirty money, from very simple to very complex. For example, you can exchange the laundered money at a virtual currency exchange, buy BTC at an ATM, or through a peer-to-peer service and trade them on an exchange. You can smuggle larger cash into another country for deposit and then withdraw small amounts to avoid raising suspicion. You can divide your money into small sums and deposit them as bank deposits in a dozen domestic banks. You can set up brokerage accounts, invest in the traditional stock market, and trade stocks. You can put your money in several or more investment funds, buy jewelry, paintings, gold, or real estate. You can also easily launder your left money by buying on auction portals and gambling on gambling sites.

Over the past 30 years, various countries around the world have introduced many laws aimed at preventing and detecting money laundering crimes.

Are these laws effective? Opinions are divided. Some say yes. Others think that it is at a minimum. And what does money laundering look like globally?

The United Nations Office on Drugs and Crime estimates that, according to conservative estimates, global money laundering transactions account for between $800 billion and $2 trillion annually.

In other words, they amount to between 2% and 5% of global GDP.

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Heyoan
Heyoan

I'm a fan of cryptography and blockchain technology.


www.publish0x.com/heyoan
www.publish0x.com/heyoan

I am a crypto vault enthusiast and I have been dealing with the digital market since 2015. I systematically analyze market trends and invest in crypto values. In the articles, I present my opinion and leave it to the readers to draw conclusions.

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