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Home Blog KYC and AML for crypto exchanges
Article by Yunis
17 September 2022 (Updated 28 September 2022)

Crypto Exchanges must comply with local regulations to operate. There are strict laws to prevent crypto markets from being used for illicit activities.

Know Your Customer (KYC) process is a part of Anti-Money Laundering rules. To prevent illegal activities, traditional banks and crypto exchanges must verify users' identities.
What is KYC? Platforms without KYC logo
  • KYC procedures are parts of AML laws.
  • Exchanges may offer better-tailored services to customers after KYC.
  • Decentralized Exchanges don't require KYC or any type of identity verification.
  • DEXes can be used in complete anonymity.

What is KYC?

KYC is short for Know Your Customer. KYC is mostly an obligatory process for platforms to be able to operate in a country as a legit financial institution. The KYC process is the verification of a user's identity. By doing this, companies try to prevent their platforms and services from becoming a tool for criminal activities such as money laundering. 

Why is KYC needed?

Local authorities require platforms to perform KYC rules to comply with regulations in many countries, including the United States, the United Kingdom, Europe, and Canada. Platforms can be held responsible for illicit activities if a user misuses the platforms' services. KYC also allows companies to learn more about their customer so the company can offer a better-tailored service for specific customers.

What is AML Compliance?

AML is short for Anti-Money Laundering. KYC is just a part of the whole AML regulations. Cryptocurrencies, by their nature, are a very convenient tool for overseas wealth transfer. There are common crypto criticisms that criminals use crypto. Countries are trying to update financial regulations and widen the coverage zone to include crypto assets. Most crypto platforms comply with AML regulations and report unusual activities to the authorities.

 


 

KYC types

There are different types of KYC processes; the first one is; the Customer Identification Program (CIP). CIP is the basic level KYC. All banks and other financial institutions require customers to provide proof of their identity. When you want to open a bank account, the bank must collect a state-issued ID to accept you as a customer. Crypto exchanges are different, and they require your ID after enrollment. You can sign up and open an account on a crypto exchange, but then you will have limited services. Once you provide your ID, you will have more options, such as futures and margin trading.
 
Customer Due Diligence (DD) is a secondary level of KYC processes. A company may want to learn more about the customer's identity after ID verification. The banks or exchanges may find some customers or transactions suspicious and ask for deeper verification. If you suddenly transfer a large amount of funds or if you have been subject to financial fraud or investigation, you might be asked for more than ID verification.
 
Another part of the KYC process is ongoing monitoring. The banks or exchanges may have strong doubt about whether a customer is involved in some illegal activities or not. Then the company can actively monitor and ask for ID and other supportive financial documents regularly.

KYC and Anonymity on Decentralized Exchanges 

While centralized exchanges are obliged to collect ID information from customers, decentralized exchanges are exempt because of their natures. Decentralized exchanges run on a distributed computer power network and are not hosted from a specific location. They are smart contracts on a blockchain. Decentralized exchanges don't require KYC.
 
Anyone can create an online wallet and connect their wallet to decentralized apps. You can trade, swap, exchange or stake your coins on Decentralized Exchanges. You can also lend or borrow on smart contract-powered DEXes. You don't need any KYC, ID or background check.

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