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The role of KYC in digital currency exchanges
Since last year, the digital currency market has grown rapidly. The recent market value has exceeded 2 trillion U.S. dollars, and there are more than 5,000 digital currencies in circulation.
However, in the world of digital currencies, changes are often rapid. Investors have also noticed the two sides of Bitcoin. It rose from US$19,783 in 2018 to US$3,400. Later, after Elon Musk posted #Bitcoin on Twitter, it rose by 20%. ETH has gone through a similar process. It fell from US$1,300 to US$91 in 2018, and rose to US$450 by the end of 2020.
This kind of roller coaster change has become a very attractive investment option for investors who are looking for excitement. Such price fluctuations also allow wise investors to seek opportunities for huge profits, but the method and timing of transactions are particularly important. In addition, since volatility will induce some illegal behavior, anyone who participates in bitcoin transactions should be vigilant.
It is precisely because of this that the judiciary has been looking for new ways to curb these illegal activities. One of the methods that digital currency platforms comply with is to use the KYC-Know Your Customer agreement. KYC has existed in the traditional banking and financial world for several years, and is now gradually being widely used by digital currency platforms.
Let’s learn more about KYC today.
Everything you should know about KYC
KYC is the process of confirming the customer’s identity, address, financial activities and all risks that the customer may face. KYC is performed when the new member account is bound to the digital currency wallet of the trading platform. Usually used for the following purposes.
- Confirm the actual identity of customers
- Build trust and increase transparency for other customers and third parties
- Understand customer activities
- Determine whether customer activities are legal
- Identify user-related risks and exclude high-risk users and criminals from the platform
- Confirm Possibility of money laundering
- Prevent fraud and phishing
For a long time, the money laundering law has been working hard to prevent illegal financing. Since the digital currency exchange is recognized as a service company, it has been restricted by AML (Anti Money Laundering) and KYC.
Practitioners in the digital currency industry now have two choices. According to the existing KYC guidelines, customers who are unwilling to be restricted can be refused and restarted, or those who have KYC may lose their qualifications for the business license as an obligation.
Why does the time of digital currency affect KYC?
The KYC debate has a strong response in the digital currency community. Its sudden impact is in the following points.
- Price fluncuation
- The recent strong trends in the crypto market are attracting new customers to participate in the market every day. Rising prices have caused many people to sign up for digital currency platforms. It may be difficult for users with a non-simple purpose. Strict KYC procedures can restrict this type of new users.
- Increase in money laundering
- In 2019, 2.8 billion US dollars were laundered in digital currency exchanges. Money laundering funds can be used for any purpose such as buying and selling drugs, trafficking in human beings, tax evasion, and funds for terrorist activities. Through KYC, exchanges can confirm user identity details and help curb crime.
- Develop guidelines
- After ordinary people began to pay attention to digital currency, the regulatory authorities began to pay more attention to the digital currency market. In order to support the long-term growth of the industry and stabilize the digital currency market, the restriction policy is being popularized.
- Tax evasion
- After huge fluctuations in the price of digital currencies, investors may cheat on taxes. In 2019, the overall national tax due to the government and tax difference is about 600 billion U.S. dollars. KYC helps reduce tax evasion.
What impact does KYC have on decentralization?
KYC exists to prevent fraud and mismanagement of funds. Compliance with KYC regulations can prevent criminal acts such as money laundering on digital exchange platforms and raising funds for terrorist activities. Users will also worry about whether KYC will conflict with the decentralization of digital currency services.
Although there are decentralized KYC applications that combine KYC and decentralization, as digital currencies continue to be adopted, exchanges must clearly understand that they must comply with digital currency standards and welcome restrictions if they want to adopt them in large quantities.