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The Importance of KYC for Crypto Exchanges

Published on
March 28, 2024
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As the crypto space craze for anonymity faces enhanced scrutiny from regulators worldwide, even the most reluctant crypto exchanges are compelled to introduce KYC and AML measures. Knowing what decisive steps to take to enforce KYC compliance perdurably in an ever-changing regulatory environment will be of the utmost importance for crypto exchanges from here on after.

Will KYC rules encompass all crypto exchanges?

KYC (Know Your Customer/Client) is a fundamental part of AML (Anti-Money Laundering) regulative compliance requiring financial institutions to carry out specific identity and background checks on their clients. The KYC obligations now also encompass crypto exchanges in many parts of the world as AML requirements and other regulatory demands are steadily expanding into the crypto space. For crypto exchanges looking to offer services in jurisdictions like the U.S., Australia, and the U.K., having proper KYC measures in place will likely be a must. The approach towards legislation in the crypto space differs among countries, but radical changes to the regulatory framework are imminent wherever definite legislation is lacking today.

New rules proposed by the European Commission will oblige cryptocurrency exchanges to collect clients' identifying information in line with the KYC rules. In the wake of the infamous Pandora Papers published in 2021, an EU directive to stop the misuse of shell companies has been proposed. This indicates that KYB (Know Your Business) will be another increasingly important part of compliance strategy within the crypto industry ahead. For more regulatory oversight on financial institutions and the crypto sector, an EU-wide anti-money laundering authority (AMLA) is proposed to be established by 2023.

Henceforth, KYC - including KYB - will be a requirement that individuals and businesses trading cryptocurrencies encounter on just about all centralised crypto exchanges. Centralised means trusting a third party that monitors and secures assets on behalf of the buyer and seller. Those who prefer to stay anonymous and trade at higher risk have other decentralised options, such as peer-to-peer crypto marketplaces. Whether those alternatives will persist in their current unregulated state once the legislative focus on the crypto sector becomes clear enough to manifest itself into practice remains to be seen in the years to come.

Woman with phone

FATF urges crypto exchanges to implement KYC measures

The travel rule, which already applies to transfers of fiat currencies between financial institutions, is liable to include cryptocurrency and crypto exchanges according to the Financial Action Task Force (FATF) recommendations. Consequently, token transfers must provide certain KYC information about the originator and the beneficiary so that the receiving financial intermediary can check the sender's name against sanction lists or check the correctness of the beneficiary information. FATF is the international regulatory body making norm-forming recommendations on measures for combating financial crimes. Their guidance may not be law, but it is authoritative as FATF regularly issue reports on how well its global network of member states follows set recommendations. Ongoing transaction monitoring is another requirement that crypto exchanges must fulfil to comply with FATF's recommendations and the possible future law. This is an essential part of a risk-based approach to AML, which most traditional financial institutions already abide by. In summary: The increasing adoption of cryptocurrency worldwide and its exponential market growth makes the case that KYC rules for crypto exchanges will expand globally and prompt increased regulatory enforcement.

Establishing and implementing internal policies, procedures, and a strong compliance regime to comply with applicable and upcoming laws and regulations will be crucial for crypto exchanges in 2022 and onwards. Crypto exchanges that strive to be safe and trustworthy must prioritise having automation KYC processes and real-time risk monitoring of crypto transactions and addresses in place. By being KYC compliant and screening all the transactions coming in and out, exchanges can quickly and efficiently review the movement of crypto assets. And by screening addresses before transactions are fully processed, they can ensure that their platform and users are not interacting with addresses involved in corrupt activities and protect their clients from sending funds to fraudulent platforms or brokers.

Bitcoin and law

How exchanges meet applicable and upcoming KYC requirements

Crypto exchanges are fully equipped and well-prepared to meet compliance requirements and avoid costly audits from regulators, with ZignSec as their sole compliance solution provider. Among other things, our fast, smooth, and accurate crypto risk monitoring solution provides exchanges with a competitive advantage through risk management, platform safety and compliance. This solution has automated transaction monitoring with powerful AI that assesses crypto addresses and transactions and generates risk scores and reports that are easy to present and understand. Its sophisticated transaction analysis scanning billions of data points and crypto addresses boosts the ability to detect criminal activity. The tool for real-time risk scoring flags transactions or addresses associated with terrorism financing, money laundering or other illegal activity, increasing the speed and accuracy of investigations and decision-making.

Given the ongoing legislative evolution, crypto exchanges need to meet all applicable KYC and KYB demands while also well-prepared to comply with upcoming regulatory requirements. ZignSec offers crypto exchanges all over the world access to our comprehensive aggregate supply of local and global compliance solutions and national eID schemes. A single connection to our platform renders regulated entities fully equipped with KYC and KYB solutions for customer onboarding, due diligence, and monitoring.

Our all-in-one platform also serves as a global orchestration layer that enables automation for complete KYC and KYB processes that meet best-practice and AML requirements globally and locally. Via a single interface, affiliated organisations can easily combine expedient compliance solutions into bespoke workflows and processes to fulfil specific industry standards or meet country-specific regulatory divergence. With ZignSec's No Code Compliance Manager at their disposal, crypto exchanges utilise a web tool with a drag-and-drop feature to build, optimise, and automate workflows, connecting them with the best global and local compliance solutions for each market. ZignSec is a one-stop-shop continuously adding advisable and advantageous compliance solutions to its overall supply; this capacitate affiliated organisations to stay ahead of crucial regulatory changes whenever new compliance requirements are imposed.

Verify and validate the legitimacy of your corporate clients

Evaluating corporate clients involves digging, investigation, and complicated decision-making. Our extensive portfolio of KYB-focused products and workflow solutions mitigate these efforts.