Significance of AML/KYC Compliance in the Cryptocurrency Industry
Since the beginning of the twenty-first century, the finance sector has undergone drastic revolutions due to the emergence of innovative digital technologies. The finance sector has transitioned from traditional financial institutions like banks and insurance companies to a digital space of cryptocurrencies and virtual assets.
Digital asset ownership has emerged as the latest revolution in financial technologies, and almost 24 countries have legalized cryptocurrency and virtual assets. This is due to the immense potential of this industry to transform the global financial system entirely. However, the opportunities for investment in digital currency also open the ways for financial criminals to engage in crimes such as money laundering and even terrorist financing via the crypto industry. Thus, crypto firms must ensure AML/KYC compliance to prevent financial crimes.
Difference Between KYC and AML
There are slight differences between KYC and AML, but both procedures are interrelated to a great extent. Know-your-customer is a mechanism to know everything about your customers through their identity verification. Document verification is the foremost step in the KYC process, and the latter is an essential step for every organization, financial and non-financial, during its customer onboarding process. Meanwhile, AML refers to anti-money laundering measures implemented by organizations, especially financial institutions like banks and cryptocurrency exchanges, to comply with regulatory guidelines. The prime objective of AML is to restrict financial crimes. As mentioned earlier, both processes are interconnected, so KYC is one of the approaches in AML. Anti-money laundering is a broader action plan for compliance with regulatory guidelines, and KYC is one of the measures taken to achieve that. Therefore, both these terms are often discussed together as AML/KYC.
What is KYC/AML Compliance?
After discussing the fundamental relationship between AML and KYC, it is essential to understand the concept of compliance. It means that a company or a financial organization must abide by the applicable regulatory laws and regulations. This includes the rules established by the government and those put forth by regulatory authorities. Therefore, financial institutions like banks and cryptocurrency exchanges should adhere to the established anti-money laundering laws to ensure successful KYC/AML compliance and prevent financial crimes.
KYC/AML Compliance in Cryptocurrency Industry
The crypto industry is taking longer to adopt AML/KYC compliance because of its abrupt rise, evolving nature and several factors. These features are as follows:
- Crypto firms are free of cost, and account sign-up takes just a few seconds.
- The user is anonymous during account creation.
- Exchange rates in the crypto sector are continuously fluctuating, which makes it easy to justify the abrupt growth in digital wealth.
Therefore, financial criminals found a security vacuum in the cryptocurrency sector. It led them to commit financial malpractices, such as money laundering and terrorist financing, instead of the relatively regulated banks. BBC revealed that about USD 8.6 billion of cryptocurrency was laundered in 2021. This showcases crypto’s lack of security apparatus that eases illegal economic practices. Hence, if a crypto firm has not yet implemented measures to ensure AML/KYC compliance, they should immediately resort to the compliance mechanisms.
AML/KYC Regulations for Cryptocurrency
State governments have devised laws and regulations for AML/KYC procedures in cryptocurrency to prevent the exchanges from becoming a medium of illegal financial flows. The United States has stringent AML/KYC regulations and legislation. The US Crimes Enforcement Network (FinCEN) has set regulatory standards for cryptocurrency firms and other digital asset companies for smooth AML/KYC compliance and prevention of financial crimes. Likewise, the European Union presented the Digital Finance Package in 2020, focusing mainly on the digital finance sector. It highlighted a digital finance strategy and introduced laws on the digital asset marketplace. Other than governmental initiatives, inter-governmental organizations have also come to the forefront of anti-money laundering measures. FATF is a watchdog over all worldwide financial transactions and monitors countries regarding AML/KYC compliance.
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Digital Onboarding KYC via Video Calls
Digital onboarding KYC refers to customer onboarding procedures through digital methods. Video call is one of the most efficient online KYC solutions for AML/KYC compliance for banks and the virtual asset industry. This service solution offers face-to-face interaction between the digital currency firm and its customers. Both sides engage with each other through a video call, aided by a video KYC vendor or SaaS solution provider. It is the most convenient and reliable customer verification method because it enables organizations to identify which customers are safe to onboard and which pose any threat. Therefore, video call proves an authentic means to know your customer.
KYC Compliance Software
KYC compliance software is a solution that provides identity verification services to financial and nonfinancial organizations in real time. It ensures that cryptocurrency exchanges and banks adhere to the regulations and achieve AML/KYC compliance. It has the following features:
- KYC software provides an automated platform to monitor all the AML/KYC compliance procedures. Thus, this software tracks your crypto firm’s progress to prevent financial crimes.
- Moreover, compliance software scrutinizes customers against global watchlists and sanctions to perform risk assessments, assigning them their risk scores. Enhanced due diligence is performed on high-risk customers.
In a Nutshell
AML/KYC compliance is highly significant for cryptocurrency and other digital asset businesses. The above discussion sheds light on everything you must know as the owner of a digital currency enterprise.