Summary
KYC checks require financial service providers to identify and verify the identity of their customers. This comes as part of efforts to combat money laundering/combat financing of terrorism (AML/CFT), to confront financial crimes and ensure due diligence for customers.
Identity verification proactively combats criminal activity by collecting and verifying customer information. These checks enhance confidence in the field and help financial service providers manage their risks. Identity verification has become a common practice on digital currency platforms. But some critics say it robs the cryptocurrency space of the anonymity and decentralization that cryptocurrencies are known for.
the introduction
Identity verification is a common regulatory requirement that financial service providers are required to meet. Identity verification checks primarily combat the financing of illegal activities and the resulting money laundering. Identity verification is one of the basic procedures in anti-money laundering regulations, which makes it an important safety measure for digital currencies in particular. Financial institutions and service providers like Binance are increasingly implementing stringent identity verification measures to protect their clients and assets.
What is identity verification?
If you created an account on a cryptocurrency trading platform, you'll likely have to complete an identity verification check. Identity verification requires financial service providers to collect information that proves the identity of customers. This can be done via an official identity document or bank statements, for example. Like anti-money laundering regulations, identity verification policies help combat money laundering, the financing of terrorist activities, fraud, and the illicit transfer of funds.
Identity verification is a proactive, not reactive, approach. Most financial service providers obtain detailed customer data during the joining process before enabling them to carry out financial transactions. In some cases, accounts can be created without identity verification, but their functionality is limited. Binance, for example, allows users to open an account but places restrictions on trading until identity verification is completed.
When you complete the identity verification, you may be asked to provide:
Government ID proof
Driving License
Travel permit
Other than verifying a customer's identity, it is important to confirm their location and address. Identity documents provide basic information such as your name and date of birth, but there is some other information required to confirm your tax residence address, for example. You will likely need to complete more than one stage of identity verification. Financial service providers often need to re-verify the identity of their customers regularly.
Who regulates the obligation to verify identity?
Identity verification regulations vary by country, but there is international cooperation on the basic information required. In the United States, the Bank Secrecy Act and the Patriot Act of 2001 were enacted, which included most of the anti-money laundering and identity verification processes known to us today. The European Union and Asia-Pacific countries have established their own regulations, but they overlap to a large extent with those of the United States. The EU Anti-Money Laundering Directive (AMLD) and the Payment Services Directive 2 (PSD2) are the main framework for EU countries. At the global level, the Financial Action Task Force (FATF) coordinates multinational cooperation on regulatory settings.
Why do we need anti-money laundering in cryptocurrencies?
Due to the identity-encrypted nature of digital currencies, criminals use them to launder illicit money and evade paying taxes. Improving the regulation of digital currencies improves their reputation and ensures that taxes are paid when due. There are three main reasons why we need identity verification checks in the cryptocurrency space:
1. Blockchain transactions are irreversible. There is no administration capable of helping you when mistakes are made, which means that your money could be stolen or transferred and cannot be recovered in this case.
2. Cryptocurrencies are anonymous (i.e. carry a pseudonym). You do not need to provide any personal data to open a cryptocurrency wallet.
3. Regulatory rules are still blurry regarding taxes and cryptocurrency law in many countries.
Although identity verification increases the time required to create an account, it has obvious benefits. The average user will not necessarily notice these benefits, but identity verification has a significant impact on the safety of your funds and the fight against crime.
What are the most important benefits of identity verification?
The benefits of identity verification are not all obvious. But identity verification goes far beyond just fighting fraud, and can improve the performance of the financial system as a whole:
1. Lenders can easily assess their risks when confirming a customer's identity and financial history. This process leads to more responsible lending and risk management.
2. Identity verification combats identity theft and other types of financial fraud.
3. Identity verification proactively reduces the risk of money laundering before it occurs in the first place.
4. Identity verification enhances trust, security and accountability of financial service providers. This improvement in reputation has implications for the financial sector as a whole and can encourage investment.
Identity verification and decentralization
From the beginning, cryptocurrencies have focused on decentralization and freedom from intermediaries. As mentioned, anyone can create a wallet and hold cryptocurrencies without having to provide any data about themselves. But for precisely these reasons, digital currencies have become a popular means of money laundering.
Governments and regulators typically require trading platforms to complete identity verification checks on their clients. While identity verification is very difficult to implement on cryptocurrency wallets, services that exchange local currencies into digital currencies are better suited for this purpose. Some investors are interested in speculating in digital currencies, while others are more interested in their fundamental values and utility.
Criticisms of identity verification
Identity verification has clear benefits, but it remains controversial and criticized. Criticisms of identity verification are more widespread in the world of digital currencies due to its history and background. Typically, these criticisms stem from issues related to privacy and cost:
1. Identity verification practices have an additional cost that the customer often pays in the form of fees.
2. Some individuals do not have the required identification documents to verify their identity, or do not have a fixed address. This makes it difficult for them to use certain financial services.
3. Irresponsible financial service providers may neglect to secure data, and hacking operations can lead to the theft of your personal data.
4. Some argue that identity verification opposes the decentralization of cryptocurrencies.
Concluding thoughts
Identity verification processes are a standard for the financial services industry and cryptocurrency trading platforms. It is one of the most important measures in efforts to combat money laundering and other crimes. Some may be upset by these checks, but they greatly enhance security. As part of broader anti-money laundering practices, identity verification allows you to trade cryptocurrencies on platforms like Binance with greater confidence and safety.