KYC AML Guide: the Clock shows the average reeding time of the blog13 min Read


KYC AML Guide: the Clock shows the average reeding time of the blogNovember 8, 2023

Regulating Crypto Institutions: How They Verify KYC Documents?

Cryptocurrency is a tremendously fascinating field that has the potential to drastically alter the traditional financial landscape. There is substantial growth potential, which has drawn investors from all over the world. People are also drawn to blockchain technology because of the transparency it brings. However, cryptocurrency has a dark side as well in the shadows of anonymous transactions, fraud, money laundering, and other financial crimes can thrive. Cryptocurrency exchanges, like financial services, have legal requirements to Know Your Customer (KYC). The goal is to safeguard client privacy and assets during the onboarding process.

Belal Mahmoud

KYC Product Consultant

What Is KYC Crypto?

KYC in crypto is a technique that cryptocurrency exchanges use during onboarding to verify customers’ identities and effectively comprehend their financial activity and dangers. These procedures are mandated by law and, if carried out appropriately, should be swift and safe.

Each country has its own set of KYC standards. Some call for ID documents. Others ask customers to complete an online form to open an account. During the KYC procedure, crypto firms acquire identification information such as:

  • Legal name
  • Birthdate
  • Address
  • National ID number

Cryptographic exchanges are frequently required by legislation to use advanced security techniques to preserve account information. Applying KYC to a cryptocurrency account is a standard and safe procedure. Many cryptocurrency exchanges have KYC procedures in place. CoinDCX, for example, is one of India’s largest cryptocurrency exchanges, with over 3.4 million customers. CoinDCX India has evolved into the most secure exchange, allowing consumers to easily access crypto data.

Also read our whitepaper: Crypto Travel Rule Compliance: Technical and Regulatory Challenges

Are Crypto Exchanges Money Service Businesses (MSB)?

Global regulators are more interested in crypto assets than ever before. In 2019, for example, the SEC, FinCEN, and CFTC designated cryptocurrency exchanges as Money Service Businesses (MSBs). This means that these businesses are subject to Know Your Customer (KYC) and Anti-Money Laundering (AML) laws under the Bank Secrecy Act 1970s.

According to FinCEN: “The definition of a money transmitter does not distinguish between real currencies and convertible virtual currencies (CVC).

How do Crypto Institutions do KYC Document Verification?

The KYC process of a US crypto exchange often comprises the collection of the following for KYC document verification

  • Personal data such as the user’s name, date of birth, and address
  • Provide proof of address in the form of an official document such as a utility bill or bank statement. This verifies that the user lives at the address supplied during onboarding
  • A government ID, such as a passport or driver’s license, is required. it acknowledges that he is of legal age to utilize the exchange in addition to verifying the user’s identification.
  • Selfies and videos help in confirming that the user is submitting valid identification.

For example, meet Alex, a cryptocurrency enthusiast who has decided to sign up for an established cryptocurrency exchange platform. Alex wants to start trading digital assets and understands that passing through the KYC Identity verification is a necessary step. The following is how the KYC document verification procedure works:

KYC Document Verification for New Crypto User includes the process of user registration, document submission and verification.

User Submission of Documents

Alex visits the exchange’s website and begins the registration procedure. During registration, he is asked for personal information such as his name, birth date, and residence.

Documents Submission

To verify Alex’s identification, the exchange demands that he upload specific identity documents for KYC document verification. To validate his address, Alex must send a copy of his passport and a current utility bill.

Document Verification

The exchange’s automated KYC system takes over after Alex uploads the relevant documents.

The system scans and extracts information from documents using powerful Optical Character Recognition (OCR) technology. It ensures that the documents are genuine, unaltered, and have not expired. It also compares the information provided by Alex to the information on the documents.

Optional Biometric Verification

Some cryptocurrency exchanges go the extra mile by using biometric verification to guarantee that the user’s face matches the photo on the submitted document. Alex is requested to take a selfie with his smartphone in this scenario. The exchange’s algorithm compares the selfie to the photo on his passport using facial recognition technology.

Approval and Access

Alex’s documents are successfully authenticated and verified by the exchange’s KYC document verification system. If biometric verification is employed, it will also match his face to the passport photo. Alex obtains full access to the cryptocurrency exchange platform when his KYC process is approved. He can now make deposits, trade cryptocurrencies, and participate in the exciting world of digital assets.

However, some cryptocurrency exchanges may also require customers to submit the following information as KYC standard for crypto.

  • Source of funds or the purpose of their cryptocurrency transactions. This aids in the risk assessment in the later KYC stage.
  • Transaction history, including activity from other wallets or exchanges, to ensure they are utilizing the exchange.

Following the collection of this information, the final three steps of a complete KYC procedure are:

  • Sanctions and watchlist screening involve comparing users’ information to government-approved lists to ensure they are not participating in unlawful activities or sanctioned.
  • Risk assessment is a procedure in which the exchange evaluates each user’s risk profile and the level of activity they can engage in. This could result in transaction limits and account privileges for high-risk users.
  • Ongoing monitoring of user accounts to detect questionable activities. If suspicious activity is reported, the exchange must notify the proper regulatory authorities or face fines and legal ramifications.

Can you Buy Crypto Without a KYC?

KYC is a requirement in practically all cryptocurrency exchanges. Customers can, however, continue to purchase cryptocurrency without going through the crypto KYC process. These approaches, however, are far more difficult and risky. Here are some common ways to buy crypto without KYC

  • Peer-to-Peer (P2P) Exchanges
Platforms like LocalBitcoins and Paxful do not always require KYC verification for small transactions. Larger transactions, on the other hand, may necessitate KYC.
  • Cryptocurrency ATMs
Some cryptocurrency ATMs, often known as Bitcoin ATMs, let you buy cryptocurrencies with cash without requiring KYC verification.
  • Decentralized Exchanges (DEXs)
DEXs such as Uniswap and PancakeSwap enable users to exchange cryptocurrencies directly from their wallets without KYC
  • Gift Cards and Prepaid Cards
These transactions might not always necessitate KYC.
  • Crypto Faucets and Airdrops
These usually do not require KYC, but the quantities are typically quite small.
  • Privacy Coins
For example, Monero (XMR) and Zcash (ZEC). While some exchanges may require KYC to list these coins, you can obtain them by mining or as payment for goods and services without KYC.

It is important to note that the regulatory requirement for cryptocurrencies varies by country, with some governments requiring KYC for all transactions. Furthermore, larger transactions or the conversion of cryptocurrency to fiat currency frequently trigger KYC requirements on most sites. Always make sure you understand the local legal requirements as well as the specific policies of the exchange or service you intend to use.

What are the Benefits of KYC in Crypto?

KYC is the cornerstone of AML/CFT compliance regulations. These regulations necessitate financial organizations to identify their customers and comprehend their interactions with them. Some of the benefits of KYC in crypto institutions include

  • Analyzing user identity can help to boost transparency and customer trust.
  • KYC decreases the risk of money laundering. Since 2016, cryptocurrency scams have been on the rise. According to a report from blockchain analysis firm Chainalysis, cyber criminals stole a record $3.8 billion in cryptocurrencies in 2022.
  • KYC contributes to the stability of Bitcoin exchanges. This boosts market value and draws more customers into the space.
  • Strong KYC processes assure future compliance for businesses.

Also Read: What is the ‘Crypto Travel Rule’ & How Does It Help in Combatting Money Laundering?

The Challenges of KYC in Crypto

Even with the best intentions, cryptocurrency exchanges have an uphill battle with KYC. Some of the challenges are

A Plethora of Fake IDs:

Fraudsters are well-versed in the KYC procedure and have a plethora of tools at their disposal. From synthetic IDs to deepfake videos, it’s easier than you think to get accepted on a cryptocurrency exchange with a bogus profile.

The Need to Balance Friction and Security:

Users expect speedy access to markets, especially when they are as volatile as cryptocurrency. As a result, if you create too many roadblocks throughout the onboarding process, you risk increasing churn and losing potential loyal customers in the long run.

Crypto-Ideas to be Challenged:

Crypto assets are frequently viewed by enthusiasts as a novel technology that should not be subject to the same regulations as regular financial institutions. Regulators, on the other hand, see it differently, therefore you can sweeten the deal when requesting consumers to present formal documentation, just like crypto exchanges. Many cryptocurrency exchanges, for example, provide unique offers to users who complete the KYC onboarding steps.

Compliance Fines:

You will face severe penalties if you do not implement effective KYC checks. Crypto exchanges are monitored not only by regulators but also by many crypto-related businesses. For example, in 2020, one cryptocurrency was fined $60 million for failing to comply with AML requirements.

Enhance Your Crypto Platforms with KYC AML Guide

Crypto wallets and exchanges frequently require users to provide ID cards and other documents to verify their identity. This verification method ensures that the documents presented are real or fake. If your cryptocurrency platform is looking to enhance its KYC and AML process here KYC AML guide we can assist in providing advanced KYC Tech Buying Consultancy for document verification followed by KYC Vendor analysis.


KYC AML Guide: the Facebook share KYC AML Guide: the Linkedin share KYC AML Guide: the Twitter share
Belal Mahmoud
KYC AML Guide: the Linkedin share

Belal possess over 8 years experience in the KYC Identity Verification industry. He has consulted KYC solutions for over 20 new economy companies at DIFC and ADGM while ensuring a seamless technical integration and helped in jurisdictional compliance audits.