Role of KYC and AML in the world of Crypto

Know your consumer or kyc concept. Business contraction. Hand with smartphone next to laptop

Although the phrases AML and KYC are occasionally used synonymously, they have different meanings and applications and are much less well-established in the crypto world. The states are free to implement their own legislation because there is currently no federal mandate in the United States that specifically addresses cryptocurrencies. 

However, as the exploitation of cryptocurrencies and individual users rises, loose and varied AML standards across many jurisdictions can lead to money laundering and cryptocurrency frauds. AML and KYC policies will be essential in this situation as safeguards against illegal conduct and financial crime.

Advantages of AML Compliance:

Financial institutions must adhere to a broad range of compliance requirements known as anti-money laundering (AML) to make sure that their services or online platforms don’t serve as a conduit for illegal financial activity.

Apart from the moral necessity of AML screening operations for sound global finance, firms who follow AML compliance can gain a variety of real advantages, such as:

  • Maintaining the security of consumer data across both physical and digital routes
  • Examining new clients’ histories and comparing them to sanctioned person lists using global customer databases
  • keeping strict track of transactions and reporting any illegal or questionable conduct
  • Establishing automated fraud detection systems that can prevent identity theft and restrict access to accounts
  • Avoiding affiliation with criminal activities to maintain and improve an organization’s reputation and value for shareholders
  • Lowering penalties or expenses related to breaking AML standards by designing AML compliance procedures around the rules

KYC’s Use in Crime Prevention

A subcategory of AML compliance called “Know Your Customer” (KYC) focuses on certain preventive measures to confirm clients’ identities. Customer due diligence (CDD) is one of the key KYC processes and might involve things like:

  • Before engaging in a financial transaction with a company, collecting personal information to confirm a customer’s identification and avoid fraud, as well as cross-referencing customer data with international watch lists or sanctions against individuals
  • Gathering business data to examine a client’s organisational structure, company plan, funding sources, stakeholders, and other crucial business information
  • For clients designated as high-risk, enhanced due diligence (EDD) may be performed at this time by developing risk profiles or doing risk assessments.
  • Upgrading consumer risk profiles as necessary, regularly checking customers for any suspicious behaviour or indications of unauthorised financial transactions

EDD takes additional measures, such as the following, to monitor and assess customers who may be particularly at high risk for money laundering:

  • Gathering additional proof or customer data to satisfy considerably higher “rigorous and comprehensive” EDD requirements for customer data sources
  • Preserving comprehensive customer data and results and making it simple for regulators to acquire and read EDD reports
  • Risk assessments that provide “reasonable certainty” and take into account the substantial research and procedures used for EDD
  • Keeping an eye on politically exposed individuals (PEPs) who might be used for nefarious or unethical financial gain

Cryptocurrency & Countering Money Laundering

The KYC/AML rules specifically dealing with cryptocurrencies are less developed and consistent because there is relatively little regulation on the trade of cryptocurrencies compared to fiat money. However, as more private companies and governmental organizations—including state and federal legislatures, as is the case in the US—adopt digital currencies, the complexity of such legislation especially dealing with crypto is rising.

The Financial Action Task Force (FATF) issued the first global anti-money laundering (AML) regulations for cryptocurrencies in 2014, and other international organisations like FinCEN and the European Commission have now embraced similar regulations. For the majority of their front-line KYC/AML activities, these firms also rely on virtual asset service providers (VASPs). 

NFTs and cryptocurrency exchanges are examples of VASPs because they set up specialised KYC systems, monitor transactions, and employ compliance staff to implement and execute AML rules. These entities serve as the first line of defence.

When VASPs find instances of money laundering or other financial crimes involving cryptocurrencies, they notify FATF, FinCEN, or other parties so that the information can be used in international KYC/AML databases to link illegal activities to bad actors. These international organisations frequently employ blockchain regulatory tools that can detect additional money laundering trends on the blockchain’s open ledger.

Procedures for KYC in Crypto

In comparison to controls generally employed in finance, KYC compliance for cryptocurrencies may seem a little different. There aren’t any standardised tools in general, but each type of institution—such as stablecoin providers, cryptocurrency or NFT exchanges, and the like—is frequently urged to use a variety of current tools, including biometrics (think Touch ID and Face ID), document authentication, transaction monitoring, sanctions screening, and a variety of identifying details like official IDs or places of residence, to name a few.

This means that a crypto organisation can use a wide range of KYC protocols to comply with current AML regulations. Many crypto platforms may even be in a position to create novel combinations of protocols that herald successful models to be adopted in the crypto regulatory environment. Cryptocurrency exchanges and other industry players will need to have the appropriate AML and KYC technology in place to maintain regulatory compliance, detect fraud, and prevent financial crime as the crypto industry and its accompanying rules continue to develop.


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