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How does KYC affect Crypto Transactions?

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Often, one of the key problems of the internet is that the security protocols and accompanying legislation can’t seem to keep up with its advancements. Crypto and its transactions methods used to be a highly unregulated marketplace where companies and users could exploit the decentralized framework.

However, this is now changing through the adoption of KYC (Know Your Customer) procedures. In this article, we will show how KYC is improving crypto transactions for everyone involved in the process and what we can expect to happen as legislation develops.

What is KYC?

KYC, or Know Your Customer procedures, are a response to the EU’s Fifth Anti-Money Laundering Directive, which officially recognizes cryptocurrency as a financial service.

This means that cryptocurrency is now subject to legislation and requirements that work to prevent money laundering and financing operations such as terrorism and human trafficking. KYC processes means that users have to use additional sign-in and identity verification methods to make and receive crypto transactions.

KYC Crypto and its procedures are here to stay, despite rapid changes and movements in the cryptocurrency landscape.

Crypto and illegal activity

It’s no secret that illegal activity and underground transactions are still taking place between blockchain users. In 2021, it’s estimated that $8.6 billion was laundered in illegal cryptocurrency. However, now that global regulators are focusing on cryptocurrency transactions, it’s the responsibility of the crypto companies to meet AML/CFT requirements.

KYC and crypto transactions

KYC means that identity verification plays more of a role in cryptocurrency transactions. This means that data such as names, addresses and date of births must be included in order to process and approve transactions.

There is some pushback from those who believe that the anonymity of cryptocurrency is a key element of the currency. However, with the recent shift in legislation, KYC criteria will become more prevalent and continue to evolve in regard to crypto transactions.

Customer monitoring will also play more of a role, with customers’ transactions subject to ongoing monitoring and scrutiny to prevent criminal activity. Unusual activity or transaction patterns and high-risk customers and locations will all be subject to additional surveillance.

Screening is another KYC requirement that now applies to cryptocurrency transactions. It’s the responsibility of the cryptocurrency companies to flag users that have international sanctions imposed on them or a PEP (politically-exposed person) who could be involved in money laundering.

It’s also the cryptocurrency company’s responsibility to identify any ‘money muling’, wherein a neutral third party is used or coerced to engage with cryptocurrency exchanges on a criminal’s behalf.

This is achieved by identifying markers where a customer’s wealth or profile doesn’t match their financial behavior.

KYC procedures and the future of cryptocurrency transactions

KYC protocols and cryptocurrency transactions will continue to evolve with the rapidly changing environment of the crypto market.

As lawmakers try to regulate exchanges and clamp down on criminal activity, this in turn makes the marketplace safer and more beneficial for the individual user.

In the future, we can expect to see more KYC procedures levied by more of the exchanges, whilst retaining all of the other perks associated with cryptocurrency.

Source: Plato Data Intelligence: PlatoData.io

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