What is Customer Authentication (KYC)? A tool to fight money laundering

CryptocurrencyWhat is Customer Authentication (KYC)? A tool to fight money laundering
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Know Your Customer (KYC) is regulated by governments’ anti-money laundering (AML) laws in order to prevent money laundering and criminal activities.

At first, these rules were set only for financial institutions, but nowadays they are also applied to non-financial institutions. It should also be said that customer authentication, customer recognition policy, know your customer are all equivalent of KYC.

But what is KYC? In this article, we discuss the authentication, importance, steps and processes of KYC.

Key points of KYC

  • The word KYC stands for Know Your Customer.
  • KYC or identity authentication is the process by which the identity of the customer is identified and confirmed.
  • Digital currency exchanges authenticate their users for various reasons such as preventing money laundering, criminal activities, as well as increasing transparency and building trust among customers.
  • The steps, levels and authentication documents in digital currency exchanges are different for different users.
  • Authentication generally has three steps: filling out the identification information form, presenting identification documents, facial recognition.

In this article we will discvover together:

What is Customer Authentication or KYC?

What does KYC stand for? In short and simple, this word stands for Know Your Customer. In very simple language:

KYC or identity verification is the process by which the identity of the customer is identified and confirmed.

The purpose of authentication is to prevent money laundering and criminal activities by companies and individuals.

Today, KYC principles are implemented for banks, financial institutions, companies and digital currency exchanges. The main authentication rules are divided into 4 parts:

  • Customer acceptance rules
  • Customer identification methods
  • Track and monitor transactions
  • Risk management

Compliance with the strict rules in authentication are mandatory for financial institutions and non-financial organizations. This minimizes fraud. Because suspicious cases are prevented in advance.

Why is authentication important for crypto exchanges?

Despite the hurdles posed by KYC, cryptocurrency exchanges authenticate their customers for a variety of reasons.

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Increasing transparency and creating trust among customers is one of these reasons. One of the reasons why many users are interested in working with centralized exchanges is that in case of bankruptcy, they can track the status of their assets through legal channels.

Another reason for implementing KYC in exchanges is to reduce fraud and money laundering. From January 2021 to March 2022, more than 46,000 customers reported being defrauded of more than $1 million in crypto.

Strict authentication can go a long way in preventing fraud and money laundering.

What is AML?

Anti-Money Laundering Laws (AML or Anti-Money Laundering) refers to a set of laws and regulations that reveal attempts to justify illegal and illegitimate assets and income (activities such as money laundering, etc.) through digital currency.

Until 1986, countries did not have a specific law for money laundering and only levied taxes. Anti-Money Laundering (AML) laws were then enacted and expanded to prevent money laundering.

These laws are a set of regulations and procedures that prevent illegal money from being converted into legal and legitimate income.

Combating criminal activities including market manipulation, trading in illegal goods and tax evasion, as well as ways to hide these crimes and the proceeds of these crimes, are the main objectives of these laws.

The main difference between anti-money laundering and KYC laws is that financial institutions and digital currency exchanges use authentication to identify customers before providing services, but AML is applied on a much broader level, and in fact institutions and organizations are required to fight and counter money laundering, terrorism financing and other financial crimes.

What are the authentication steps in the exchange?

The steps, levels and authentication documents in digital currency exchanges are different from each other. Which country you live in or where you were born also overshadows this issue.

For example, authentication is mandatory to operate in the Binance exchange, and it does not give the right to use this exchange to countries that are on the OFAC sanctions list.

Authentication generally has three stages:

  • Filling out the identity information form (KYC form)
  • Provide identification documents
  • Face Recognition

Depending on the country of residence, the information required, identification documents and withdrawal limits may be different. To start the authentication process, you must first create an account for yourself, which is very simple.

This is possible only by entering an email and setting a password. If you have an identification code, you can also enter it.

Note that if you choose the country of residence of your friend, acquaintance or relative, all the information you enter from this point on must be completely in accordance with the documents of the person you are looking for, because after approval, they can no longer be changed.

In the next step, you need to enter the personal information and upload the pictures of the identity documents. According to the country of residence of the person in question, choose the type of these documents (for most users, a passport, ID card or driver’s license is required). You have to take a picture of it with a webcam, mobile camera or camera and upload it.

Different documents should be photographed and uploaded according to the standard defined by the exchange. After uploading the identification document, the system will ask you to take a selfie of yourself along with your passport and upload it.

After this step, the system will ask you to complete your face verification. Click Continue to do this. After completing these steps, you will have to wait for a while for your authentication to take place. As soon as your account is confirmed, you will be sent an email from the exchange.

What is KYC form?

KYC form is a form designed as an identity verification process. This form is provided by banks, financial institutions and insurance companies and they must complete the required information. In the bank authentication form, these are usually common:

Proof of identity

  • Identity card of the customer’s country, passport, driver’s license
  • The birth certificate has a photo issued by a government and legal body.
  • Identification card issued by the university.

Fixed address

  • Passport, ID card, residence card, driver’s license, insurance card
  • Telephone, gas or electricity bills that are no more than 3 months past due.
  • Bank account report or savings account book that is no more than 3 months old.
  • Declaration of non-compliance

The connection of authentication with banking and finance

Banking and financial industries are among the most complex areas of communication with customers. These industries are constantly at risk of money laundering and other criminal uses. Governments and legislators have set very strict standards regarding these industries.

The KYC process in banking is no different from other industries. But strict security standards are required by the regulators, which are different from all other industries.

One of the global standards created by the legislators is the video streaming system. Customers have moved out of time-consuming, costly and bureaucratic systems into safer and faster processes.

With video authentication, 3 weeks have become 3 minutes and it can be done with any type of camera.

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There are other provisions to limit money laundering, financing of terrorism and other illegal activities.

More than 190 laws have been established in the world, which are known as recommendations of the Financial Action Task Force (FATF). FATF is a semi-governmental organization created to fight money laundering.

These rules include authentication procedures, but still, with all these interpretations, traditional authentication cannot prevent illegal and criminal activities in some cases.

Of course, by using blockchain technology, many KYC processes can be done more quickly and accurately.

KYC using blockchain

Authentication processes are also a tool to detect and prevent criminal behavior around the world. Despite its great importance, customer recognition policies are ineffective in many financial institutions due to issues that negatively impact users and their experience (such as tedious, repetitive processes, and risk of error).

Regulatory, cost and customer experience challenges make it clear that a change needs to happen in customer authentication. To realize such a goal, technology plays the main role, but can blockchain be the main solution?

Blockchain’s stability and transparency provide a simple way for financial institutions to quickly and securely access up-to-date customer information.

This increases operational efficiency, increases trust between institutions, and also reduces cost, process time, and user information collection. By using a blockchain-enabled KYC tool, financial institutions can reduce wait times and eliminate the need to repeatedly provide the same information to their financial service providers.

While financial institutions have been looking for a solution to identity problems for a long time, today suitable solutions for authentication are provided in the form of blockchain.

The computing structure of the blockchain allows the collection of information from trusted service providers to put this information in a single place, a safe and secure encrypted database.

The authentication process using blockchain has the potential to be much faster, simpler, more secure and more effective than traditional KYC.

Use Proof of Concept (POC) for authentication

In Singapore, KPMG and Bluzelle network, with the cooperation of three banks and the Infocomm regulatory body in this country, worked together to develop a Proof of Concept on blockchain.

This prototype has successfully passed the test of Singapore’s monetary authorities. In addition to the issue of stability, efficiency and security, this platform can bring about 25-50% cost savings.

An institution or bank can send a request to the desired blockchain platform to access customer information. In this type of structure, access to information only requires the consent of the user.

To obtain consent, a user only needs to log into their account and define a private key to access their information. In this method, although the information is accessible by an intermediary (bank, organization, etc.), the ownership of this information will still be with the user.

The concept of blockchain-based identity recognition has been presented by technology giants such as IBM.

The Integrated Distributed Authentication Project is an efficient, secure, and decentralized mechanism used to verify, collect, store, and distribute authentication information to clients.

Is using a customer identification tool (KYC) with blockchain a good solution?

While the blockchain-based tool reduces the time and costs of collecting customer information by banks, it is better that banks still take reasonable measures regarding the information collected from the platform.

Particular attention should be paid to issues such as privacy regulations and customer permissions.

Although blockchain can bring significant benefits, it should be noted that only one solution does not solve all needs, and not all KYC issues can be solved in this way. The customer recognition tool in blockchain can be created at one of these three financial, national and international levels.

Additionally, other issues such as data quality and KYC requirements, privacy regulations, customer authorizations, and market competition need to be further explored for widespread dissemination.

However, Blockchain authentication tools, when used in combination with other technologies, show strong potential to help financial institutions reduce the time and costs associated with KYC processes. It also provides broader visibility for regulators and a better customer experience.

Frequently Asked Questions on KYC

What is authentication or KYC?

It is a process that is carried out especially in banks and financial institutions to prevent illegal actions and money laundering. According to this process, identity information and sometimes place of residence are taken and confirmed from people. Most centralized digital currency exchanges have also made authentication mandatory for their users to protect themselves from regulators.

What is KYC?

KYC stands for “Know Your Customer”.


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