The acronym KYC or Know Your Customer refers to a series of processes designed to comply with a series of regulations that apply to the banking and investment sector, in order to verify the identity of a client, create a profile of it and recognize where the money that mobilizes within a service comes from.
BBasically, a KYC generates a user file in which all the necessary data of that client is recorded and its financial profile is built, so that the relevant entities and authorities can recognize it and the associated level of risk.
The application of KYC has gradually become a mandatory standard to provide financial services. First, in order to maintain the security of the services and second, to recognize that the funds mobilized and the people in their midst are not related to illicit acts or other forms of illegality recognized or attributed to that person.
How does a KYC work?
To achieve all this, the KYC process comprises three phases:
- First of all, it depends on a customer identification program (CIP). This point establishes the requirements to determine and verify the identity of any person seeking to establish a relationship with a financial institution. The most basic data in this regard are your full name, identity document number, date of birth, residence address and complete tax. Of course, the legislations may require more data to comply with different CIPs, but internationally, the basic data are these.
- Next, it goes through the realization of the customer due diligence (CDD). At this point, the aim is to identify the client and verify his identity using documents, data or reliable information from independent sources. In addition, the identification of the final beneficiary can be included and reasonable measures taken to verify their identity, so that the financial institution is satisfied that they know who they are. For legal persons and other legal arrangements, this should include financial institutions understanding the ownership and control structure of the customer. At this point, you can also investigate the origin of the funds, especially if the person mobilizes large sums frequently (for example: mobilize more than €10.000 a day to different accounts).
- Finally, it goes through continuous supervision or enhanced due diligence (EDD) of a customer's account once it has been established. In this last point, we try to know some vital information about the origin of funds or business data of the client. For example, if the client is a businessman, it is tried to know where his business is located, the nature of it and the purpose of its operations. If, for example, the client is an employee, we try to find out where he works, how long he has worked there and his salary, in order to have a more complete profile.
These three points indicated here are basic in KYC and practically apply throughout the world. However, each country or region has its own rules that can tighten or relax certain factors within KYC.
KYC for cryptocurrencies in Europe
In Europe, KYC policies are managed by the European Council and these are then applied by the relevant authorities in each of the countries of the Union. The latest standard approved by the commission that affects KYC in the crypto world is MiCA, which was approved on October 5, 2022. The MiCA regulation has been created in order to make the European Union regulation on cryptocurrencies and all financial services related to it much more homogeneous. One of those first regulations is to make MiCA a regulation with greater relevance than current national laws, something it has achieved by introducing the first licensing regime for cryptocurrency wallets and exchanges to operate in the 27 member countries of the EU.
As part of those changes, MiCA requires all cryptocurrency services to verify the identity of their customers, making Know Your Customer (KYC) mandatory for wallets in Europe. Along with MiCA, the AMLD5 regulations complement the regulatory framework that will weigh on exchanges operating in Europe, and that will be fully applicable from the year 2024.
https://www.youtube.com/watch?v=f54sW4Bgw9g&list=PLXjCFEppTZE7cNqnzrpOSKDN00Cd_K5KZ
Why do we need KYC?
The main objective of KYC is to obtain personal information from clients, verify the veracity of the data and classify clients according to their relative risk for the use of banking and financial services. The main intention of this is to prevent dangerous clients from compromising the security of a set of financial services. For example, a customer with a fraud profile within a P2P marketplace is very likely to carry out fraud operations that could compromise the financial security of platform users. Considering that crypto does not offer cashback support, this is a measure that can help reduce such situations.