Crypto KYC – KYC in Blockchain

Blockchain is a great instrument for protecting data on the Internet, as it allows you to store it in cloud databases and yet provides authenticity and security. What is the best thing for the procedure «Know your client», or «KYC». This blog answers the question.

Traditional KYC Systems

The identity of an individual can easily be traced with the help of documents issued by the State; such as passports, birth certificates, social security cards or driving licences. However, this is good only face-to-face. If you need to verify a person’s identity from a distance, it is fairly easy to circumvent him by obtaining the original or a copy of the required document.

The «Know your client» procedure was invented to reduce the risks of such fraud. This has considerably improved the reliability of identity checks but has rendered ineffective, long and not transparent the verification process in respect of the use of users’ personal and business data.

The traditional KYC procedure mostly involves three elements:

• IDV (ID check). Identity verification – the provision of an original document, scanned copy, or photograph. This usually involves a superficial check and sometimes the documents are matched against databases, for instance credit history.
• Application of the Client Identification Program. The verification of documents against different state and corporate blacklists. There is no unified pattern for this process. And organizations select the control option in correspondence with their own possibilities and the demands of the required jurisdiction. It might be the same documents or fingerprints or a face scan.
• Identification by video. Means of identification by video (Skype, Viber, Google Hangouts, etc.).

In traditional KYCs, the user gets independently verified by each different organization or government agency. Suppose you plan to take a different online loan in several banks; every bank will then independently check on your identity.

This is a big minus of classic KYC systems – each check requires time and resources. Moreover, this method is vulnerable from a security point of view, because at every check personal data is transmitted from the client to the server and can be intercepted. And bank servers can be hacked.

KYC-systems developed on blockchain

Architecture of DLT and Blockchain allows data gathering from different service providers onto one crypto, perpetual database that does not need third-party authentication. It enables you to build the system where the user would have to go through the KYC process once only and provide this platform for verification of his identity.

The confirmation algorithm of identity in the bank example above will look something like this:

Only with the consent of the user will access to the user data be provided in such an ecosystem. To provide this consent, the user needs to log in, and as in any cryptocurrency transaction, the private key has to be used to initialize the information exchange operation. The user’s consent – with the third party in this case being the bank – may provide access to the data, but ownership will remain with the user.

A similar idea of the blockchain-based KYC platform has already found its practical implementation. Among the best-known examples of such a project, one should point out the joint work of IBM, Deutsche Bank, HSBC, Mitsubishi UFJ Financial Group (MUFG), and Treasuries of Cargill. This collaboration proposes an efficient, secure, and decentralized mechanism of verification, collection, storage, update, and sharing of KYC data.

How Blockchain improves KYC

Blockchain-based KYC utilities will definitely lead to cost cuts and improve personal data security in literally any field where identity checks are required. Now, let’s look at the advantages of such systems.

User data collection

As it is now: Currently, in financial, banking, public, and other sectors, users’ personal data are collected and kept within centralized systems-repositories. Every time someone needs access to this data, from the repository of the KYC provider, the data goes directly to the requesting company’s devices.

What’s happening with blockchain: each participant – collected personal data in person, be it banks, government agencies, companies, or users themselves, is stored in a decentralized network. The data will be accessed directly by the authorized user or any third party.

In this case, it will be possible to give access not to the personal data but to the specific identification card that attests to the successful completion of this procedure. By doing so, personal information will be kept safe, and any third party will be able to confirm whether their client is who he claims to be.

Advantages of Blockchain Solution

• Personal data security is ensured
• The power of full control over the data is given completely to individuals.
• Prevention from unauthorized data access
• Conforms to the latest data protection legislation, including new EU General Data Protection Regulation GDPR

Automation and Standardization

As is. KYCs gather and share information amongst organizations, businesses, and other bodies every day. Usually, data in this respect flows from one organization to another through a chain of mediators relying on various communication protocols, APIs, and management systems. Exactly the same happens with humans, who need to confirm and validate data and also authorize certain activities. This type of architecture inevitably leads to a great number of errors, inconsistencies, and crucial vulnerabilities for unauthorized access.

How the blockchain will be able to route the KYC workflows coded into smart contracts and standardized across all industries. Data exchange in such environment would be fail-safe as monetary transactions in a bitcoin or ethereum cryptocurrency payment systems.

Strong points in using blockchain

• No need for manual surveillance.
• Reduce errors, inaccuracies and data loss.
• Able to implement multilingual solutions through smart contracts, standardization and online translation tools.
• Reduced KYC Processes

Risk decentralization

As it is. Traditional KYC procedure is almost always performed either by a particular company or by the KYC service provider. In both cases this means that the process is fully centralized. That is, one structure decides what verification should be, conducts it itself, stores collected user data and chooses how to use it.

It leads to increased risks:

• Illegal and immoral use of data.
• Hacker attacks – one server is easier to hack.
• Phishing and DDoS Attacks.
• Human Error.

How blockchain. A system based on a decentralized distribution register excludes any possibility of monopolizing control. The impossibility to change both data recorded in blockchain and in the open source code allows to be sure that the rules of the game for all participants are equal and there are no “black entries” in the program.

Automation and standardization of basic processes limit and control the level of human intervention; blockchain logs who did what, and this information cannot be deleted.

Benefits of using blockchain

• Protection from human error and fraud.
• Automation of major regulatory issues; for example, bank and insurer risk assessment processes.
• Reduction of infringement of the law by the CSPs.
• Reduced probability of industrial monopolization.

KYC Data Quality.

Poor quality data can be obtained from the existing client-server, centralized repository-based storage system in which all participants of the ecosystem are forced to continuously share user personal information. This was a strong tendency, further increased with the number of participants.

This is a direct result of non-uniform standards in the industry and the fact that banks, companies, emerging companies, government agencies, and KYC service providers are using different approaches to store and transfer data. Additionally, different communication protocols, APIs, and platforms and systems of data management are employed.

What happens to the blockchain: The solution from CMC – based on a decentralized register of distribution – will create a system in which all the data is stored in one medium accessible to all platforms. The industry will become automatically unified, and most of the interactions between participants will become meaningless – there is no need to share information if it is written on a blockchain open to everyone.

Benefits of blockchain usage

• Data quality will improve (no errors, inaccuracies, inconsistencies, false data etc.).
• Data security will improve; data will no more be transferred from one participant to the other several times in a day.
• Will increase standardization in industry.
• Communication and transparency.

As is. In the classic KUS-system, nothing depended on the ordinary user. It didn’t matter what documents he needed to submit for the KYC procedures, and he really didn’t know anything about how his personal data would be processed. Moreover, banks, companies, and CACs themselves lose control of the process when data is shared with other participants. Currently, the system was not transparent and beyond the control of anyone.

What’s happening on the blockchain. This open source platform, in and of itself the source of truth, combined with smart contracts allows you to build in a relationship wherein all participants know what the rules of the game are, and all participants are confident that no one can break or circumvent those rules.

Using blockchain advantages

• Rise in the level of confidence of participants in each other as well as in the industry as a whole
• No longer any need for secondary verification or cross-checking
• Less fraud-if everyone knows what you are doing, it is difficult to hide fraud and/or avoid responsibility
• Enhanced reporting and communication processes-time and money savings

Warning of suspicious activity

As it is now. Business and the state continuously raise the cost of KYC processes. However, they have not yet developed any efficient tool for monitoring the violation of legislation in this field. It is possible for participants to fake data, manage it at their discretion, and bypass the law one way or another. The result is that money laundering and terrorist financing are increasing in the world despite the CFA/AML regulations being tightened.

What’s happening on the blockchain. The process of KYC controlled and maintained by all parties involved in the process through distributed ledgers and smart contracts. The system will trace any tampering or manipulation of data done on the client part, and the infraction of rules will be known by all parties.

Benefits using blockchain

• Speeding up the process of fraud detection, the system may independently notify all interested persons about violations of the rules, attacks on the platform, etc.

Applying KYC systems to blockchain. KYC on blockchain can be useful in many industries other than banks and other financial institutions. Large parts of companies, organizations, and government have interest in knowing who they are interacting with.
The most promising examples of KYC on blockchain:

• Identity identification for a number of different kinds of plebiscites: local, regional, state, corporate, and public ones.
• Identification of citizens by public authorities according to various social services and taxes.
• Checking the age of consumers by providers of video games and media content in order to prevent access to materials in accordance with PEGI-European Union, ESRB-United States, RARS-Russia, USK-Germany, ACB-Australia.
• Identification of loyalty program participants.
• An identity check at the border.
• Online Purchase.

The most interesting thing about KYC on the blockchain is that after primary identification of users, all further checks can be reduced to a simple demonstration of a digital ID card. It is possible to use such a card by analogy with a passport or driver’s license: required, shown and continued. Only the reliability and security of such a card will be much higher.

5 KYC cases on the blockchain

Know Your Customer

The KYC procedure – in “know your customer” – binds all financial institutions, including exchanges of cryptocurrencies, to identify and verify the identity of each of their customers. And it needs to be performed prior to allowing the company to perform financial operations. In such a way, it secures companies from fraudsters and terrorists, securing the clients’ assets. Once it was only the internal policy of every company, but for about 5 years, KYC has been a clear legal practice.

Crypto exchanges are entitled to establish the levels of verification, but it is supposed that the following information about the user is at their disposal: given name, surname and patronymic – date of birth; e-mail address, telephone number; country and place of residence address; identification document, passport, driver’s license, etc.
It is not enough just to declare the data. The phone is to be verified with an SMS one-time code, passport data-photos of documents and selfies with them, the address of accommodation-for example, a utility bill.

And the more money you want to put on the stock exchange, the more information can be required. There is usually the basic level of KYC that permits all major operations and then advanced ones, which you need to pass if you want to stock very, very large sums. For example, we have 4 verification levels on FREE2EX. At the same time, for 90% of clients, it’s enough to pass all verifications only up to the second one.

Unfortunately, some users believe that full verification is a violation of the anonymity principle of blockchain technology. But in fact, it’s indicative that KYC maintains safe space for all to conduct the transaction.

AML – Anti-Money Laundering

Now consider the following abbreviation;) From the name, everybody has already understood that it is a fight against money laundering. The concept of anti-money laundering has only been theoretically developed following the creation of the Financial Action Task Force, FATF, in 1989. The full title is entitled “Countering the laundering of proceeds of crime, the financing of terrorism and the financing of weapons of mass destruction”.

Transparency of the blockchain network lets any user track any possible kind of cryptocurrency transaction. That kind of information is publicly available, though without the possibility to identify owners of crypto wallets and the motivation for the transfer. However, any kind of transfer can be connected with such illegal activities as terrorism, phishing, or ransom. Obviously, Satoshi created Bitcoin for exclusively good purposes. But, like many other great developments, the crypt is not immune to criminal use. Therefore, buying the crypt “hand” we will never know whether these hands were “clean”.

And just to identify the proceeds of crime, cryptocurrency implements the AML policy (prevention of money laundering). It includes a broader range of measures than the LCCs:

• Transaction monitoring
• Verification of encryption purity (encryption)
• Risk assessment
• Bank card verification

KYC procedure in the ICO

Generally speaking, the procedure “Know your client” – is a concept came from the banking and exchange sphere, the world of finance. That means every company operating with funds of the private persons must identify the counterparty, establish his identity before the financial transaction.

The Initial Coin Offering is so far a relatively new phenomenon in the world of finance. That’s how developers have been launching new cryptocurrency projects and raise funds for creating and developing them. For example, in 2021, using this very mechanism, different teams managed to raise over $6 billion in total. Such high turnover could not go unnoticed by government regulators all over the world.

As we have already mentioned, financial institutions carry out checks of clients whose funds they manage: local laws on combating fraud and money laundering may require this, «On combating legalization (laundering) of proceeds of crime and financing of terrorism». In addition, the CVS procedure in ISOC provides a number of additional opportunities for the organization conducting the CVS and makes it more reliable in the eyes of regulators.

Identification answers the following questions:

• Who brings in money to the project.
• That’s what money is for
• Where they are coming from.

For ICO, KYC is a procedure of verification of tokens buyers and/or members of the development team executed by the platform that has launched ICO or using third-party services.

Who should implement KYC, AML and crypto sanctions in the sphere

All those who are interested in crypto should take part in this. First of all, crypto exchanges. They work both with fiat and tokens, ー ideal for crooks who want money.

You should file a verification of identity for companies operating the facilities of coin storage-so-called crypto wallets, those holding ICO, or taking part in it. Of course, it is very important for a potential investor to invest in a project that evokes confidence. On the other hand, fully legal ICOs allow the creator of the idea to find benefits. Then the blockchain founders of the project may withdraw money for the development and improvement of the product on quite legitimate grounds. KUS and AML inspections will enhance the reputation of ICO in the market by establishing the legal framework. Remember: if we do not take appropriate measures, ICO may well turn into a money laundering tool.

It is very important that these directions will be followed by the experts, the advisers, lawyers who are able to influence the legislative sphere. If the system will work «dirty» money and shadow accounts we are not able to create a stable financial structure and a reliable business environment. Consultants should find out customers with fraudulent intentions in advance.

And because the cryptosphere is changing very fast, all market participants need to accept the rules of the game. Only under these conditions can a safe environment for settlements and investments be created.

Why implement the KYC procedure

At this point, there may be a reasonable question: why would a buyer identify themselves, and why would the project need this?

First, let’s take a look at what is sold during the ICO.

Legalization in the Long Run

Any business that aspires to prosper and have a longer life span must consider and abide by laws in place. Legitimacy of the project comes from the extent to which crypto assets and management contracts are well-developed and protected.

More Public Acceptance of the Project

Despite general «hype» around cryptocurrencies and ICOs, the lack of rules and regulation, general information about the very phenomena makes them potentially vulnerable for fraudsters. The more group informs the public about their overall plans, financial structure, use of leveraged funds, associated risks and other aspects of the project – the better people will be able to appreciate the value of proposal for themselves.

Expansion of coverage.

Following this procedure of YCL voluntarily, helps any ICO project address a wider audience and extend the number of jurisdictions where any particular platform has a right to operate. It will help to involve new investors, especially from Canada and the United States with their strict laws.

Funds tracking.

If the ICO opens to US investors, a consideration should be made regarding how to prevent them from selling their purchased tokens within the next 12 months. And if American investors are not allowed on the project, how do we prevent them from buying in the future? Synthesis of UGC procedures with anti-money laundering legislation will enable better monitoring of money flows and communication with investors.

To avoid fines.

Many jurisdictions have the line of legislation that presumes heavy fines against ICO projects if these projects are recognized as the sales of securities according to local financial law. The KYC allows you to follow the law and avoid the penalties.
Particularly, for the ICO KYC platform means the following:

• Checking and confirming the investor’s identity;
• Analysis of his personal, financial and business activities;
• Calculating the risks of fraud, theft, or money-laundering.

The sphere of cryptocurrency continues developing at an active pace, which accordingly leads to the emergence of new terms. So, since the current period of the cryptocurrency industry could be described as “cryptocurrency winter”, I decided to devote this time to the study of new terms and new directions emerging in this field.

Recently, there was a clear trend to introduce into all known crypto-sites the rule of KYC-identification for those who want to cooperate with regulators. More this principle is a rule than a function while registering crowdseils and verifying cryptocurrencies. But today, hardly anyone knows about the new rule that has already been actively implemented: BAT – Know your deal. Though now the public wasn’t well known, this rule had great potential. At a minimum, it could seriously damage everyone whose cryptocurrency would be recognized as “blurred” in criminal schemes.

How clean are your cryptocurrencies?

I really do not believe any users are wondering about how clean their coins are right now. Indeed, what difference does it make how digital assets were used before they finally reached the next owner? Also at an acute angle, the question is: «Doesn’t the discrimination of «black» coins contradict the concept of interchangeability? ». However, whether or not the majority wants it, the KYT rule is actively gaining momentum.

The same trend, in turn, may divide the Bitcoin network into two states: one for verified users, another one for unveiled with their “gray money”. It should be pointed out that along with the active development of KYT, the company Chainalysis is closely connected with this process. The company specializes in tracing money on blockchain. For now, her reputation in the crypto community is considered, let’s say, quite controversial. On one hand, the employees of the company managed to find stolen bitcoins from MtGox. On the other hand, users, however, are not particularly pleased with the fact that all their translations are recorded and linked with identification data.
Seeing as Chainalysis has just recently received an investment of $30 million, a similar tracking tool will most likely soon become available for all popular blockchains.

KYC for ICO team

There is also a Know Your Customer procedure for the ICO team. Many authorities in the cryptocurrency world consider it crucial to assess the reliability and success of the project, so identification is often carried out by the developers themselves. For example, information on KYC for the team is published by the portal ICOBench.

How the KYC procedure works

The process of investor verification takes place:

• All online.
• Confirm identity by meeting an authorized agent.

Anyway, to participate in the ICO and be verified, the person needs to register on the website of the project, where he or she will be asked to confirm his or her identity by submitting a set of documents-usually series/numbers of these, with scanned copies. Then, the service processes this information and confirms or rejects the identification of the citizen.

Sometimes, the procedure requires an additional meeting with a certified specialist-a service agent who performs the final stage of verification at a time convenient for the client.

The basis of ICO platforms is both proprietary KYC and third-party solutions-for example, Sum&Substance. For further information on KYC within the selected jurisdiction, please consult our legal department. Please do not hesitate to contact us, book your personal consultation, and provide a proper foundation for your successful crypto business. Our company has, at this moment, for sale a cryptocurrency exchange license, that provides a unique opportunity for market entry into cryptocurrency space: crypto exchange licence.

KYC process of customers on crypto exchanges

In the world of cryptocurrencies, in which, from their very basis, anonymity and security go hand in hand, the so-called KYC process is turning into an essential ingredient to try to guarantee maximum transparency and impede financial crimes such as money laundering (AML) and terrorist financing. For this reason, cryptocurrency exchanges are putting in place the KYC procedure in order to meet regulatory demands and safeguard their platforms against users with malicious intent.

What is KYC?

KYC is a process by means of which exchanges can verify their customers against suspicious activity. It typically includes collection, verification, and storage of personal information of customers. The very reason for its implementation is not to let the financial system be used in money laundering and terrorist financing purposes.

Steps of the KYC process on cryptocurrency exchanges

What the client is required to present

• Personal information: Full name, date of birth, and residential address.
• Contact info: Email, phone.
• ID: Passport, driving license, or other document proving identity.
• Proof of residence: Utility bills, bank statements.
• Biometrics: In some cases for additional security.

Among the most important features to guarantee financial transaction security and compliance issues related to cryptocurrency exchanges comes with the procedure of KYC. Though it may look different for users, these measures are for their own protection, as well as for the protection of the entire financial system from abuses. It is important to take seriously the process of KYC and provide only adequate and updated information.

How Blockchain Technology is Making the KYC and AML Process Better

The blockchain technology was meant for, and still is mainly utilized in, cryptocurrencies. However, it has slowly started to gain new applications outside the financially related world. The promised significant improvements in blockchain are in the processes of KYC and AML compliance. In this article, we will look at exactly how blockchain technology can improve these processes.

Introduction to KYC and AML issues

KYC and AML have been very obligatory processes in many firms around the world, especially within a financial framework, so as to avoid financial crimes. It deals with data collection from customers, its verification, and storage so that the financial transactions are done by valid people. However, most of the traditional methods of KYC and AML are time-consuming, expensive, and bear the chances of leakage.

Solution on Blockchain

It provides a decentralized, transparent, and safe system that can revolutionize the domain of KYC and AML in the following ways:

The use of blockchain technology can provide promising opportunities for transforming and optimizing KYC and AML processes regarding enhancing security, reducing costs, raising transparency, and deepening collaboration across agents. In this respect, it allows for the surmounting of a number of shortfalls of current systems. In any case, complete integration of blockchain into these processes will require further research, development, and possibly changes in regulation with a view to being able to adapt to new technological realities.

Which services are the most popular for KYC in Europe

The fact is that over the years, particularly with the increase in importance of KYC/AML procedures in Europe, different programs and services have appeared to make this process easier and automatize it for companies. These solutions allow companies to respond to regulatory obligations, enhance customer verification quality, and reduce risks. Following are some of the most used types of KYC services in Europe.

Which industry, geographical location, and size of the customer database will determine the type of programme or service to conduct KYC and AML procedures. A platform needs to be chosen for running regulatory compliance while at the same time choosing a convenient and secure process for the clients. These above-mentioned services are among the various solutions available in the market, all with their core features and benefits that will meet the different enterprise needs of today’s businesses in Europe.

Table showing the basic data required to conduct KYC

This information helps organisations carry out proper due diligence on their customers, fulfill regulatory demands, and lessen risks of financial crimes.

How to implement the KYC process in 2024

The Know Your Customer process is at the core of various industries’ regulatory compliance for 2024, especially within those financial sectors where the process falls at the heart of anti-money laundering and financing of terror. Over these years, the regulatory requirements about the process of KYC multiplied and became more detailed, hence forcing the organizations to go for advanced measures of verification of their customers. The brief overview of key regulatory requirements related to the KYC process in the year 2024 is highlighted below.

Basic requirements for the KYC process

In 2024, KYC will challenge organizations to pay attention not only to the fulfillment of regulatory requirements but also to finding new methods and technologies for effective and secure verification of customers’ identities. Successful adherence to KYC prevents not only financial risk and fraud but builds customer trust in an organization that will contribute to its long-term success and development.