What is the KYC Process and Why is It Important?

Anyone who’s ever signed up for a cryptocurrency exchange has gone through the Know-Your-Customer (KYC) process. It’s a verification protocol that makes sure whoever is using the account is actually who they say they are.

There wasn’t much opposition when KYC was introduced to major financial institutions in 2001. The US was one of the first economies to implement this policy. Now it’s a global requirement for most fintech services.

The thing about KYC is it requires a comprehensive level of personal details, similar to when doing your tax returns. Back in the day, data protection wasn’t a real concern so people didn’t feel deterred by how much information they had to provide.

Nowadays, however, a little bit of scrutiny can put users on edge. In the world of cryptocurrency, this is an even bigger issue. Anonymity was the essence of bitcoin and the whole blockchain system it’s built on, so it’s hard to hit everyone with a centralized bookkeeping idea.

Nonetheless, we can’t deny the benefit of KYC and its systematic purpose - preventing money laundering and protecting users’ accounts. A lot of money is involved in the crypto space, so an extra layer of insurance is a great thing to have.

How Does KYC Work?
When you sign up for an exchange, it will ask for basic information, such as name, date of birth, and email address. KYC adds another layer of security by having you provide additional details. This step can vary depending on the platform and also on the country you live in.

In general, you’d be asked to provide a national identification number on top of your name and address. When the US officialized KYC, customers would then need to provide their social security number. Other nationalities all have to submit an equivalent of the SSN, often their passport number or national ID number.

The next step is proving that SSN or national ID belongs to you. To do that, you must send a photo of it. Some platforms even require a photo of you holding it, and some need to see the front and back of your ID. The bigger the exchange, the higher their level of security.

It doesn’t end there. After sending in your ID, you’ll need to verify your address. This step is often called proof of address. In many countries, your name and national ID are usually associated with your address by default. For people in the West like America or Canada, that’s not often the case. You can have a home address and a mailing address and they aren’t always listed under the same name. This alone makes the KYC process obligatory.

To verify your address, all you need is a copy of a utility bill or some type of invoice sent to the home. The recency of this bill may vary across exchanges, but most will require it to be at least three months old. You might even come upon a platform that asks for two bills and three months apart.

Verifying your address can be tricky, especially in countries that don’t normally require an address for most services. The US is one such country - you can get by with just a P.O box even when applying for a job. This is also one of the reasons America is strict on crypto and its uses.

Once you’ve verified your address, the account would be ready for use. On most crypto exchanges, you can still access their trading services and main features for a short time. Some companies will allow up to two weeks for you to complete this process. If you haven’t finished the verification process by then, consider your playtime over. You’d still be able to trade and withdraw in some cases, but all other features would be locked, taking a lot of enjoyment from the experience.

Why is KYC Important?
Having a KYC application allows companies to identify their customers and pinpoint any of their transactions at a moment’s notice. As the same information is linked with their banks, exchanges can easily communicate with them should an issue arise.

Know-Your-Customers can also prevent money laundering and discourage illegal activities. Since all transactions will trace back to your identity, there is little room for malicious ambition.

Once your KYC process is complete, you’ll never have to worry about it again. Couple this with two-factor authentication, your account is always secure. The only gripe some of us may have with doing KYC is how long it takes in the beginning. Some exchanges can take days, even weeks, to verify all your information. So, if you sign up to use a specific feature within a time window, waiting for KYC would probably take away that opportunity.

While KYC is required by law to use most financial institutions, it’s still a new concept in the crypto space. As of 2020, almost half of crypto exchanges still hadn’t implemented it or any type of security measures beyond basic information inquiry.

This fact did not worry as many users as it should have as most still embrace the anonymity solution. It actually gave rise to decentralized exchanges (DEX) such as Sushiswap and other P2P networks. On those, you can do pretty much anything you want as there are few to no regulations. The problem with that is other people can do whatever they want as well and when your money is involved with their decisions, you’d be at risk. Worse, you’d be fully responsible for any losses.

Conclusion
We should emphasize that it’s important to look for an exchange that operates with KYC. It shows they comply with the law and are committed to your privacy. The initial process can be tedious but keep in mind you only have to do it once.

Many countries that are crypto-friendly have been putting effort into making things easier for traders. For example, we are compatible with Singpass at Liquid, which is a one-app-for-all means of verification for Singapore users.