KYC/AML Compliance in Crypto Industry - Introduction for Business Owners

Anna Buczak
02 December 2020 · 10 min read

Improved financial technology has eased money transfers by leaps and bounds in recent years. This has undermined the security measures and laws implemented by regulators and law enforcement agencies to prevent illegal transactions. According to a report, the U.S. banks have handled over $2 trillion in suspicious transactions.

The advent of cryptocurrencies has made both local and international transactions even more effortless. Due to this, regulators have grown highly skeptical of cryptocurrency transactions. They are extra cautious while assessing and approving companies operating in the blockchain and cryptocurrency space.

“Know your customer” (KYC) and “Anti-money laundering” (AML) regulations have played a crucial role in reducing illegal transactions through both traditional systems and cryptocurrencies. More than ever, cryptocurrency companies need to strictly abide by these regulations to prevent any legal consequences. Global AML regulation is heavily influenced by the policies that shape the United States’ approach to money laundering and terrorist in crypto arena.

This article takes a closer look at what KYC/AML requirements are, explain why it is important to meet these regulations and presents the list of companies providing such services. The terms presented in this blogpost aim at businesses planning to build their crypto products or services, such as crypto exchanges, trading platforms, digital wallets, crypto apps, and many more.

What is KYC in crypto?

Know your customer (KYC) is the process cryptocurrency companies, or any payment service provider for that matter, need to enforce in their operational process to verify the identity of their customers.

For example, a cryptocurrency payments platform must require all its users to upload their identification details before creating their complete profile. These details may include:

  • Full name
  • Phone number
  • Residential or physical address with a proof
  • Copy of national identity document or passport
  • A portrait with the ID proof or a selfie video

WireX is one such platform that verifies its users by asking for an identification document such as a passport along with a video recorded within the application. The platform uses the video and the uploaded document to cross-verify if the identification provided by the user is legitimate.

At the foundational level, cryptocurrency users do not require to reveal their identity to anyone for transacting any amount of money. Even the transactions are recorded in an encrypted manner, keeping the transacting parties anonymous.

From a legal perspective, this may have severe repercussions. It may open doors for many illegitimate activities that lawmakers have tried hard to suppress all this time.

Implementing KYC procedures helps the companies identify their users in case of any suspicious transactions.

What is AML in crypto?

Anti-money laundering (AML) is an all-inclusive legal term that refers to the set of rules and procedures followed by entities to recognize and prevent illegal transactions and terrorism financing. Many money launderers even follow methods that are designed to make illegitimate transaction may look legitimate. AML laws and procedures aim to detect and curb these activities.

Hundreds of millions of dollars are laundered every year. So far, banks have been a major medium for launderers to launder funds beyond borders. Regulators fear that cryptocurrencies can be the next big financial instrument for laundering money anywhere in the world.

This is because of two major reasons:

  • Cryptocurrency transactions are anonymous
  • Cryptocurrencies do not necessarily need a centralized financial institution to process the transactions

As money laundering often includes transactions made between several nations, there are international AML regulations to tackle such situations. The Financial Action Task Force, or FATF, is the global AML regulator that outlines and updates international standards for member nations to fight money laundering and terrorism financing worldwide.

More specifically, in the world of cryptocurrencies, AML refers to the tracking and tracing of blockchain transactions and building cyclic graphs to identify the movement of money. Based on the obtained data, such solution providers identify where and how the funds are moving.

Elliptic monitor transactions, detects and visualizes the transaction flow. The graph below was created to gasp the idea of how risk monitoring works. Each circle is a representation of a bitcoin address. Various colors show to what extent the funds have been diluted by bitcoins from other sources where red means receiving scam funds and yellow means receiving bitcoins from other sources too. Numbers represent the amount of cryptocurrency that has been sent to the proper address.

Elliptic monitores transactions, detects and visualizes the transaction flow.

The datasets also distinguish transactions based on several factors and mark them as low, medium, high, or severe-risk transactions. Chainanalysis distinguishes the following risk levels of a category or a service:

Chainanalysis distinguishes the following risk levels of a category or a service.

Source: Chainalysis.com

This process allows crypto exchanges or service providers to take necessary actions whenever high or severe-risk transactions come through on their platform.

Who needs to comply with KYC/AML regulations?

It can be said without a doubt that all financial institutions and companies either providing direct payment services or other forms of financial services need to be KYC/AML compliant. For a financial institution of any size and form, such compliance have been made mandatory by governments.

Know your customers and anti money laundering compliance is all the more critical for crypto organizations as they are strictly under the microscope of regulators. And the slightest failure to comply with these laws may lead to legal consequences for the owners of the company.

As AML and KYC verification is not an easy process, companies need to pay a substantial amount to solution providers. However, the cost of not complying with the laws may prove even more expensive.

Why crypto exchanges need KYC/AML compliance?

Crypto exchanges form a major part of the crypto industry. On the day of writing, the total cryptocurrency trading volume on all crypto exchanges globally exceeds $122 billion.

As cryptocurrency exchange platforms facilitate such huge amounts of trade, there’s a terrific opportunity for bad actors and money launderers to launder huge sums without anyone noticing. But that is only possible if an exchange platform does not have proper compliance solution integrated into their exchange portal.

Crypto exchange that comply with regulations may easily detect suspicious transactions and trace the funds back to its users. They may then identify the customers using the KYC details submitted by them.

This will not only help crypto exchanges promote more legal activities using cryptocurrencies but also enable regulators to hold accountable the people involved in illegal transactions. Besides, if the compliance program of crypto exchanges is implemented, they have a better chance of building trust both in their platform and in the crypto arena.

AML and KYC compliance in the UK and across the world

In 2019, FATF introduced the Travel Rule for virtual asset service providers (VASPs) in the United Kingdom and across the world. Besides, the European Union introduced the Fifth Money Laundering Directive while the U.K implemented its own version of the directive after parting from the EU.

Before these directives, much of the crypto organisations and financial institutions fell in the grey area of money laundering regulations. With the new directives, crypto firms in the U.K. are now subject to money laundering regulations within the country. As part of the KYC process, the crypto firms in the U.K. must at least obtain from their customers:

  • their full name,
  • a copy of their ID along with the date of birth, and
  • a residential address proof

Similar regulations are being formed throughout the world after FATF put out the Travel Rule and brought it into play this year. While many countries are still far behind in terms of creating a full-fledged regulatory framework for cryptocurrencies, progress is evident all over the world.

Companies providing KYC/AML solutions

As KYC process mostly remains the same even in the case of crypto platforms, most KYC companies in this space are commonly found across other sectors. AML companies for crypto, however, follow a completely different approach as they have to deal with anonymous transactions on the blockchain. So, most crypto AML service providers have specifically designed their services to serve the blockchain and crypto space.

Here’s a list of companies that have crafted their solutions for cryptocurrency companies:

KYC solution providers

  • Persona

    Persona was founded in 2018 with the intention to make customer identification and authentication smoother for companies that need AML/KYC compliance. It has thousands of authoritative data sources that it uses to authenticate the identity of users. These data sources cover the identities of individuals from more than 192 countries and their services are available in more than 12 languages.

  • Onfido

    Onfido was set up in 2012 to deliver customer identification services using the latest technology. It currently serves more than 1,500 companies across the globe. It uses artificial intelligence to authenticate the identification document uploaded by users within a few minutes. Some of its most widely known customers include Reolut, Bitstamp, and Couchsurfing.

  • Trulioo

    Backed by the likes of Goldman Sachs and American Express, Trulioo’s claims to have the capacity to identify over five billion people from more than 195 countries. It utilizes more than 400 data sources to verify identification details of users and businesses. Trulioo currently serves a wide range of industries from remittance platforms to banks and online marketplaces.

  • IDology

    Founded in 2003, IDology is one of the oldest companies in the identity verification industry. Similar to other KYC service providers, IDology also serves a wide array of industries including cryptocurrency platforms. The company uses its exclusive solution ExpectID to scan through thousands of data sources containing billions of public records to make the KYC process almost instantaneous.

AML solution providers

  • Chainalysis

    Chainalysis is one of the most renowned names in the blockchain and cryptocurrency research sector. The company was established in 2013 when cryptocurrencies and blockchains were still a considerably new technology. Its AML solutions cover 85% of the cryptocurrency market. It helps banks, crypto businesses, and governments track and trace crypto transactions.

  • Elliptic

    Elliptic is a blockchain analytics company founded in 2013 that specializes in compliance for crypto and blockchain firms. As one of the pioneering members in the crypto compliance industry, Elliptic too has worked with some of the biggest names in the crypto industry such as Coinbase, Binance, Wirex, and so on.

  • Coinfirm

    Coinfirm is another big name in the cryptocurrency industry and is widely recognized for its efficient KYC/AML software and solutions. It tracks more than 1,400 cryptocurrencies and provides real-time analytics and risk management services to its customers. “Reclaim Crypto” is a service recently launched by Coinfirm that aims to help victims of crypto scams and hacks recover their lost funds.

  • CipherTrace

    CipherTrace was set up in 2015 to solve the KYC and AML challenges of cryptocurrency companies and financial institutions. The company claims to add 1.5 million new attributions to its database every week. This helps the firm identify several patterns that hint toward illegal transactions or related suspicious activity. CipherTrace also helps cryptocurrency exchanges block stolen cryptocurrency funds from being traded on their platform.

  • TRM Labs

    A rather new company in the list of pioneers in the industry, TRM Labs was founded in 2018 and is backed by major venture firms such as PayPal Ventures and Y Combinator. It provides crypto firms with KYC or AML solutions along with risk scoring, transaction monitoring, and threat intelligence.

If you want to learn more about these AML companies, read our best AML software comparison.

KYC procedures and AML regulations for crypto - wrap up

It is important to understand that if cryptocurrencies are to become a mainstream form of currency, next to fiat currency, regulations are inevitable. We saw the crypto frenzy in 2017 and hundreds of scam projects looted millions of dollars from users who were still new to the cryptocurrency space. That was the time when most people lost trust in cryptocurrencies.

Thus, regulations enforcement may benefit the cryptocurrency industry to win the trust of more people. It will boost legal activities while minimizing illegal trade and exchange of cryptocurrencies.

If you are looking for an experienced software development company building products and services compliment to AML KYC regulations, such as crypto exchanges, lending platforms or digital wallets, get in touch with us.

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