What Is KYC (Know-Your-Customer) in Crypto and Why Is it Important?

You have probably heard of the term, but do you know what KYC is and what it means for crypto? Why do crypto exchanges implement it? Moreover, is it possible to buy digital currencies without going through the KYC process?

Well, wonder no more. Instead, check out our guide about what KYC’s meaning in crypto is and find out what are the main benefits of trading digital currencies on these exchanges. We also included a section on the risks associated with buying crypto on non-KYC platforms.

What Is KYC?

KYC or know-your-customer is a standard that’s used by almost all institutions dealing with money — from banks and credit unions to the best crypto exchanges. Its goal is to prevent fraud and money laundering.

On that note, KYC refers to determining the identity of the user and confirming the legitimacy of the source of their funds. It also involves understanding the nature of their activity and assessing the risk of money laundering.

The basic components of the KYC protocol include:

• Customer identification program (CIP)
• Customer due diligence program (CDD)
• Continuous monitoring

The customer identification program is related to verifying the identity of clients. CDD stands for understanding the nature of a client’s transactions. Continuous monitoring refers to keeping track of transactions. Its goal is to ensure that there are no suspicious activities.

Keep in mind that certain activities can trigger KYC re-verification. These may include changing the client’s name, address, or occupation.

In short, KYC is important because it determines whether a user meets the requirements for using a certain platform. It also confirms that users are compliant with anti-money laundering laws.

KYC Requirements for Cryptocurrency

When it comes to know-your-customer cryptocurrency requirements, they include sending a copy of your:

• ID card
• Driver’s license
• Passport
• Social Security number (US clients)
• Utility bill
• Bank statement

To be considered valid, all listed documents must be in color, readable, and uncropped. They must also show all the details. Some crypto exchanges may also ask for selfies. Failing to meet the KYC exchange requirements may result in withdrawal restrictions and an account freeze.

How Does It Work?

As mentioned above, the cryptocurrency KYC process refers to verifying the identity of the customer. On that note, after creating an account on crypto exchanges, users will have to upload pictures showing their name, date of birth, and address.

Exchanges then check the accuracy of the sent documents — they compare data from official documents, such as passports, birth certificates, and driver’s licenses.

The next step is related to determining the customer’s risk rating. The risk rating refers to the assessment of whether the client is connected to criminal activities and money laundering. In the case of high-risk clients, exchanges usually apply more strict AML measures.

After the users complete the verification process, they will be able to use their accounts to buy and sell cryptocurrencies. If there are verification issues, exchanges will ask for additional documents to be sent. If users fail to fulfill the KYC requirements, exchanges will have the right to freeze or terminate their account.

The validation process can take 1–3 days, depending on the platform.

Can You Buy Crypto Without KYC?

In short, yes. You can buy cryptocurrencies on decentralized exchanges and P2P platforms. Namely, these types of platforms don’t ask for KYC verification.

That said, decentralized platforms don’t require KYC checks. Why? Because they allow users to trade their digital currencies by connecting their crypto wallets to the exchange. At the same time, KYC verification will also not be necessary on P2P platforms. The reason for this is that their work involves connecting buyers and sellers without the intervention of a third party.

However, if you use fiat to buy cryptocurrencies, your bank or tax office may ask for verification documents.

Benefits of KYC

Implementing blockchain KYC standards comes with many benefits — here are some of them:

Reduced Risk

By implementing KYC standards, crypto exchanges reduce the risk of money laundering, as well as other forms of financial fraud. They also foster trust between exchanges and their users. Namely, users will feel much safer if they trade on an exchange that puts their security first.

Increased Market Stability

Besides being highly volatile, the crypto market is also quite unstable due to the large number of anonymous transactions. In this regard, KYC programs contribute to the stability of the market because they check the validity of all transactions.

Compliance With Regulations

By applying KYC programs, crypto exchanges prove their legitimacy and compliance with CTF and AML laws. This compliance also provides legal protection to crypto exchanges, as well as protection from paying penalties and fines.

Customer Protection

By verifying the identity of their clients, exchanges can prevent unauthorized access to their accounts.

Risks of Buying Crypto Without KYC

Buying cryptocurrencies on non-KYC exchanges comes with the following disadvantages:

Lower Liquidity

Exchanges that don’t use KYC programs, such as decentralized platforms, have lower liquidity. Why? Because their fund pool is much smaller than centralized platforms.

Higher Fees

A lack of KYC standards also means a lack of security programs. Non-KYC platforms compensate for these omissions by charging higher fees.

Lower Security

Although non-KYC exchanges provide greater privacy, their AML procedures are much weaker. This makes them more susceptible to fraud.

Cryptocurrency Exchanges Without KYC

A cryptocurrency exchange without KYC requirements is basically a platform that allows its users to trade crypto without having to upload documents that prove their identity. To register on these platforms, users only have to enter their email address. They must also have a crypto wallet.

The goal of non-KYC exchanges is to ensure the privacy of their users. That said, some of the most popular non-KYC platforms include:

• Uniswap
• Pancakeswap
• dYdX
• Bybit
• HODL HODL  

However, the lack of KYC also means that these platforms will be more prone to illegal activities and regulatory issues.

Conclusion

KYC refers to verifying the identity of clients and monitoring their transactions. The purpose of KYC programs is to prevent money laundering and financial fraud.

This protocol is applied after the client opens an account on the crypto exchange — before they receive permission to trade their coins.

By implementing KYC standards, exchanges also contribute to the stability of the crypto market. Although trading on non-KYC exchanges is also possible, it comes with a few disadvantages, such as lower liquidity and higher fees.

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