Crypto KYC and AML: Why Verification is Essential


What does Crypto KYC mean?


The first step in Anti-Money Laundering (AML) due diligence is to Know Your Customer (KYC). A financial institution (FI) promptly implements KYC processes to identify and confirm a new customer’s identification. These procedures enable FIs to evaluate the risk profile of a customer based on that person’s propensity for financial crime.

KYC is a procedure that cryptocurrency exchanges are required to follow in order to: 

  • Verify the personal data of their end users and clients.
  • Better comprehend the actions of their potential clients and confirm that they are lawful.
  • Analyze the likelihood that their clients offer a danger for money laundering.

What is Crypto KYC & AML Screening?

Crypto Anti-Money Laundering (AML) refers to the standards that licenced exchanges must meet in order to deter illicit activity. The intention is to prevent illegal money from entering the established financial system.

AML entails defining and enabling policies, training, assigned roles, and review processes in addition to KYC. Screening accounts against watchlists, monitoring transactions and using a flexible risk-based approach to verification helps guarantee an exchange is complying with AML requirements.

What is Cryptocurrency Transaction Monitoring?

Crypto exchanges and financial institutions (FIs) may spot anomalous or suspicious conduct that has to be reported to regulatory bodies with the use of a cryptocurrency transaction monitoring system, which also helps law enforcement find criminals. Monitoring transactions keeps track of the risk involved in a bitcoin wallet and the exchanges that take place there.

What does KYC Compliance look like for VASPs?

In order to stop fraudulent behaviour, VASPs implement a multi-step KYC procedure. The following are the steps:

  • Step 1: Get personally identifiable information (PII) about their clients, such as their complete name, location, date of birth, and address.
  • ‍Step 2: Compare this information to their official government-issued identities, such as a passport or state-issued driver’s licence, and evidence of address, such as a utility bill.
  • Step 3: Check the customer’s identity against government databases that contain data on sanctioned people and politically exposed people (PEP).

These procedures assist FIs in assessing the risk of virtual currency money laundering and financial crime for each client. The consumer is allowed to carry out certain actions on the bitcoin exchange if everything is in order.

What are challenges in Crypto KYC?

Due to the global nature of cryptocurrencies like Bitcoin, businesses also need to stay up with legislative evolution globally along with rising requirements regarding KYC for crypto exchanges in the United States. These currencies are simple to trade across international boundaries because of their anonymity and the public ledger framework of blockchain security, which eliminates the need for laborious conversion computations or strict central bank supervision.

Countries including the Netherlands, Switzerland, and France have implemented user digital identity standards to confront this mainly uncontrolled business. Although users in Switzerland must provide verified paperwork to establish they are the owners of non-custodial wallets, customers in the Netherlands must confirm their wallet ownership and specify how they intend to use cryptocurrency. Meanwhile, all anonymous accounts have been banned in France.

The KYC processes — gathering consumer data, validating essential information, preserving personally identifiable information (PII), and more — may prove to be a challenging and time-consuming operation as worldwide regulatory standards become increasingly complicated.

KYC and Crypto Exchanges

Cryptocurrency exchanges allow for quick financial transactions online. Yet, convenience also increases the risk of criminal behaviour and intrusions of privacy.

It makes strong, effective Regulations more necessary. But it could be difficult, due to the lack of a universal definition and a firmly acknowledged path for compliance across nations and organisations, KYC verification standards can vary and are sometimes unclear.

It might be difficult to choose which crypto exchange platform to utilise with so many companies on the market. Nonetheless, exchanges with robust KYC procedures show they are aware of and concerned about their compliance commitments. To comply with KYC standards, the best cryptocurrency trading platforms demand identity verification processes.

Do Crypto Wallets need KYC compliance?

By reducing client risk factors, improving fraud protection, and emphasising AML criteria, KYC rules safeguard bitcoin systems. A complete identity verification platform helps safeguard digital transactions for consumers and companies. By fostering a sense of safety and trust, adhering to KYC standards may help improve client confidence in cryptocurrencies.

Exchanges are responsible for safeguarding their clients’ privacy. Exchanges that prioritise privacy, security, and compliance may gain a competitive edge and discover growth prospects as rules governing what information must be lawfully published become clearer.

There are two types of cryptocurrency wallets: custodial and non-custodial (self-hosted.) Only custodial wallets are required to follow KYC procedures since they maintain the customer’s wallet’s private keys. According to the Financial Action Task Force (FATF), a VASP is “any natural or legal person that swaps, retains, safe-keeps, sells, converts, or otherwise transfers VAs on behalf of another natural or legal person.” This definition is also found on our VASP page. VASPs are now required to follow strict KYC Verification processes because they are regulated as financial institutions. KYC is not necessary for self-hosted or non-custodial wallets like MetaMask and Argent. A VASP-related custodial wallet service must have a KYC compliance policy.

What are the benefits of Crypto KYC?


Cryptocurrency exchanges gain a lot from regulatory compliance despite the operational modifications and challenges that come with applying KYC criteria for the reasons outlined below:

Increased customer trust and transparency

Transparency and consumer trust benefit from user identity verification. Users are more inclined to stick with a cryptocurrency exchange if they have faith that it is taking proactive and preventive steps to safeguard their accounts.

Reduced fraud and money laundering

More than 46,000 consumers reported losing over $1 billion in cryptocurrency to scammers between January 1 and March 31, 2022. (2022 Fletcher) A thorough identification check may drastically cut down on fraud and boost brand credibility.

Better Risk Management

Strong KYC practices will keep firms ahead of the curve as regulatory requirements change. By demanding government-issued identification and identifying the financial history and assets, KYC procedures give VASPs the ability to prevent/limit instances of fraudulent identities, stop money laundering, and evaluate client risk. These methods help firms to decrease legal and regulatory risks, freeing time to focus on growing conversion rates, speeding transactions, and assuring compliance.

More Consistent Market Stability

Because of shady, anonymous transactions, the bitcoin market is well known for its volatility. Increased identity verification in KYC procedures helps the market remain stable and rise in value.

What’s next for Crypto KYC?

KYC requirements are changing to safeguard the digital transaction area from unlawful financial activities. These restrictions are always evolving as crypto grows and innovates, and new risks emerge.

Travel Rule

Regulators are strengthening requirements for the Travel Rule, which would set regulations surrounding originator and beneficiary information to monitor transactions, in response to Financial Action Task Force (FATF) recommendations.

Several industry organisations are collaborating to develop coordinated solutions to comply with these regulations.


Smart contracts are used in decentralised finance (DeFi) to carry out tasks that were previously exclusive to financial institutions. The merits of DeFi have been discussed by supporters, according to the World Economic Forum.

“Open-source technology, economic incentives, programmable smart contracts, and decentralised governance may offer improved efficiency, chances for inclusiveness, quick innovation, and altogether new financial service arrangements,” according to a World Economic Forum research.

DeFi protocols, however, might facilitate money laundering and other illegal financial operations by allowing financial transactions without the need for KYC.


Non-Fungible Tokens (NFTs) are mathematically proven to be unique, and their ownership can be verified on a public blockchain. NFTs are more than simply glitzy digital collectables. They are a method of incorporating fundamental business principles like ownership and contracts into the development of web 3.0 platforms.

NFT Money launderers, on the other hand, may convert contaminated cash into NFTs to disguise their assets or cover a money trail with several transactions if KYC was not required.

Cryptocurrency Wallets: Custodial vs. Noncustodial

The cryptocurrency holdings of a consumer are stored on a blockchain, but how can the customer access them? A customer’s private keys are kept safe and accessible in a cryptocurrency wallet.

Assets can be kept in either a custodial or noncustodial wallet. The majority of cryptocurrency wallets are custodial, which means that a third entity manages the private keys and is more accountable for the security of the funds. Hence eKYC verification is needed in order to scale and verify users.

Noncustodial wallets provide users complete control over their private keys and money by getting rid of third parties. Because they don’t require registration with authorised exchanges, they also provide anonymity.

Although the KYC standards for anonymous cryptocurrency wallets are not yet established, both the US and the EU are beginning to look at them.

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