An Introduction to KYC in Crypto

At PurpleTrader, the safety of your funds and experience on our platform is our top priority. To ensure that we can be a trustworthy platform, we have followed the compliance and regulatory safeguards put in place by regulators for the traditional financial markets. Executing KYC (Know Your Customer) procedures on all our customers is a part of those safeguards and incredibly important to maintain our compliance with the Bank Secrecy Act and associated Anti-Money Laundering regulations.

‍

This article will dive deeper into what KYC is and how it is crucial to your customer experience.

‍

Introduction: What is KYC?

‍

KYC (Know Your Customer) is the process of verifying customers’ identities. It is a part of a set of standards designed to protect financial institutions against fraud, corruption, money laundering, and terrorist financing. KYC has become an essential practice for regulated financial institutions and a requirement for compliant organizations in the blockchain industry.

‍

KYC Requirements

‍

Listed below are the three components of KYC.

‍

Customer Identification Program (CIP)

‍

To make sure the customer is who they say they are, CIP requires that financial firms obtain at least four pieces of identifying information about a client, including name, date of birth, address, and identification number. Other possible data could include a driver's license, passport, and social security number. Some crypto exchanges have required videos or selfies as a part of their identity verification.

‍

Customer Due Diligence (CDD)

‍

CDD is a process in which the necessary customer credentials are collected to verify their identity and evaluate their risk profile for suspicious account activity. This is to understand any risk a new customer could potentially bring to a business and expose fraudulent activity. In certain circumstances, firms may require Enhanced Due Diligence (EDD) for customers at a higher risk of infiltration, terrorism financing, or money laundering. EDD will often require more information from the customer.

‍

Continuous Monitoring/Risk Management

‍

Financial institutions must continue to monitor its customers and transactions on an ongoing basis for any unusual or suspicious activity. Certain activities, such as unusual transactions, new information or changes to the client, and a change in the client’s occupation, may trigger a red flag.

Why KYC Is Important?

‍

Because of the decentralized and anonymous nature of cryptocurrencies, it has become easier and faster to send cryptocurrencies than traditional banking. However, these benefits also attract bad actors who have taken advantage of digital currencies and have presented new challenges in preventing money laundering. Criminals see cryptocurrency as a vehicle to launder money, contributing to the negative perception of crypto.

‍

Regulation within the crypto industry is still relatively new and still being figured out, which is why an effective KYC solution is necessary to prevent some of the risks associated with cryptocurrencies and keep out bad actors. Additionally, beyond the regulatory risks, crypto exchanges with inadequate or unsuitable KYC procedures also risk negatively affecting their customers’ experience of their services. Therefore, at PurpleTrader, a robust KYC procedure can help improve the overall customer experience on our platform.

‍

What Are the Benefits of KYC for Crypto?

Crypto exchanges such as PurpleTrader stand to gain substantive benefits by ensuring regulatory compliance, including:

‍

Public Perception: KYC can play an important role in improving the public perception of crypto and shed some negative associations with money laundering and scams. As a result, this could encourage wider mass adoption and investment in the space, which is a win-win for the crypto industry.

‍

Stronger Customer Transparency and Trust: Your funds are our priority, and we want to protect them. With a strong KYC procedure put in place, we are taking proactive and precautionary measures to ensure that your funds stay protected from bad actors in this space.

‍

Reduced Potential for Scams and Money Laundering: According to a report by cyber security analytics provider Chainalysis, in 2021, $8.6 billion was laundered by cryptocurrency. Additionally, in 2021, Cryptocurrency-based crime hit a new all-time high in 2021, with illicit addresses receiving $14 billion for the year, up from $7.8 billion in 2020. A strong KYC procedure can significantly reduce this fraudulent activity on our platform and prevent you from being a victim.

‍

Reduced legal risk: We expect that as the crypto market continues to grow, along with the appeal for mainstream adoption, more regulations will be put in place. At PurpleTrader, by having a solid KYC, we are staying ahead of the curve - instead of having to catch up when the time comes. This will allow us to reduce our risk of any legal challenges and regulatory penalties down the line.

‍

Enhanced stability of the crypto market: The crypto market can be described as the “wild west,” given the unregulated aspect of the industry. A large part of this is the result of a lack of accountability due to anonymous transactions, and this behavior makes it unattractive to new users. Increased identity verification programs can help stabilize the market and boost its value.

‍

‍

Closing Remarks

‍

The KYC process is meant to protect and provide a trustworthy experience to our customers, safeguard our platform, and help create a stable crypto market. Ultimately, we want to ensure our customers that we comply with regulations and do everything we can to protect our customers' funds.