Digital KYC in the Virtual Assets Industry: Enhancing AML Compliance

Ownership and investment in the digital asset industry have hiked in recent years. Cryptocurrency has become much more prominent among investors and business owners. Know-your-customer is a mandatory process during any organization’s customer onboarding. Thus, financial and non-financial institutions are widely adopting digital KYC solutions to streamline their onboarding procedures. Similarly, switching to the online KYC process is highly beneficial for the cryptocurrency and digital asset industry. It is critical for combating the threats of cybercrimes and other illegal financial practices like money laundering and terrorism financing.

Digital KYC Onboarding in Virtual Currency Market

As mentioned, the constant advancements in digital technologies have transformed the global finance sector with the emergence of cryptocurrency. According to Statista, almost 9000 cryptocurrencies are functional presently in 2023. The value of the digital asset industry is expected to reach  $102,700 million in five years. However, its growing demand has also spiraled the threat of cyber-financial crimes for the digital assets industry. It is deemed highly volatile due to fluctuations in crypto prices. Moreover, the gaps in the security system have further made cryptocurrency exchanges and digital asset firms prone to cyber and financial crimes.

Potential criminals exploit the vulnerability of the digital asset sector and commit fraud in various ways. Moreover, they attempt to transfer illicit funds through loosely monitored systems in the virtual currency market. The know-your-customer process involves customers’ verification and identity authentication to mitigate the possibilities of financial crimes. Likewise, digital KYC solutions verify customers’ identities via digital means to comply with anti-money laundering and counter-terrorism financing regulations. Cryptocurrency exchanges and digital asset firms employ digital KYC onboarding procedures to grant convenience to their customers. Most critically, it enables them to strengthen their overall security apparatus.

Digital KYC Verification – Know Your Crypto Customer

Virtual currency exchanges and digital asset holders were not subject to any financial regulations in the US for several years. It was only in 2019 that the government authorities of the US announced the inclusion of this industry in financial institutions; thus, crypto officially came under the obligations of digital KYC programs and AML/CFT regulations. They must implement a KYC program to know their crypto customers and gather information to verify their identities. Moreover, digital KYC verification allows virtual currency exchanges to assess the risk potential of your customers. Like banks, it is essential to assign a risk score to threatening customers, such as those related to money laundering or financial fraud. According to published data, more than USD 14 billion in crypto was lost because of cybercrimes in 2021. Hence, it is critical to employ digital KYC procedures during customer onboarding and avoid financial losses.

Digital KYC Verification Solution – Requirements in the United States

The United States Financial Crimes Enforcement Network (FinCEN) and other government entities announced a joint verdict on the compulsion of the digital KYC process on the virtual assets industry. It defined digital assets with various labels, including crypto exchanges, digital coins, digital tokens, etc. The mentioned firms must fulfill the following established KYC requirements in the United States.

  1. Collection of important customer details and documents, such as full name, date of birth, national identity card, social security number, passport, etc.
  2. Compliance with the Banks Secrecy Act to prevent noncompliance penalties. For example, the regulatory bodies levied a fine of USD 100 million on a major crypto exchange due to inadequate KYC measures and AML compliance failures.
  3. Adherence to the AML/CFT laws proposed by the Financial Action Task Force (FATF). They include implementing effective digital KYC verification solutions to detect suspicious customers and transaction activities.
  4. Ongoing monitoring, as a part of enhanced due diligence (EDD) of high-risk customers to eliminate possible money laundering and terrorist funding.
  5. Checking the investors against various lists, including politically exposed persons (PEPs), adverse media reports, and sanctions. The regulatory authorities constrain or completely forbid trade with certain countries and individuals.

Advantages of Digital KYC Solutions for Virtual Asset Firms

Traditional KYC procedures result in highly inefficient customer onboarding. Manual methods fail to ensure a secure environment for organizations and their customers. This is why financial institutions are widely adapting to the advancements in fintech. Digital KYC solutions are the need of the hour for crypto businesses and other digital asset enterprises because conventional KYC processes are susceptible to data leakages, hacking, money laundering, and other financial crimes. Similarly, they result in inadequate AML/CFT compliance.

Contrarily, the automated and digital KYC measures grant multi-faceted benefits to virtual currency firms. They are stated as follows:

  • Digital KYC is cost and time-effective. It enhances the customer onboarding process of financial institutions, particularly the crypto sector.
  • It ensures security for the customers because their data is protected by security protocols that are not at risk of third-party interventions or threats of data leaks.
  • It allows your virtual asset company to implement stringent surveillance of transactions and prompt response should any suspicious activity be detected.
  • Similarly, a digital KYC process lends organizations to report to relevant authorities and ensure compliance with anti-money laundering standards.
  • Lastly, it is not subjected to human error like manual procedures.

Final Thoughts

To summarize, it is stated that digital KYC holds critical significance for all financial and non-financial organizations. Banks and virtual asset companies must ensure that they adapt to automated and artificial intelligence-powered solutions. Such tools provide a swift customer onboarding process and a secure transaction environment for your financial organization.

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