Let's start with a short summary of the terms:
- KYC: Know Your Customer
- AML: Anti-Money Laundering
- FATF: Financial Action Task Force
- GDPR: General Data Protection Regulation
Here are some interesting dates:
1989: The world's largest countries met in Paris (France) at the G7 Summit to create the 'FATF: Financial Action Task Force' - ('GAFI: Groupe d'Action FInancière sur le blanchiment des capitaux' in French).
In the 1990s, it was the FATF that gave birth to the KYC and AML, following the explosion in money laundering volumes between the 1990s and 2000, but also following numerous abuses in the financial sectors during the same period.
Following the attacks of September 11, 2001, the FAFT expanded its field of action to include the fight against the financing of terrorism.
Originally KYC and AML were (and still are) used in financial sectors such as :
- Banking
- and Insurance
There is one essential point to be addressed before moving on to Cryptocurrencies. It is necessary to make the distinction in KYC & AML! Because they are not the same methods of identity verification, and they are not intended for the same people:
- KYC: is a (basic) process of verifying the identity of the customer, whether it is for Banks, Exchanges (online), or Financial Institutions, this regulation is the same for all. When we speak of 'basic customer identity verification process' this means:
- Providing proof of identity (ID Card, Driver's License, Passport)
- Proof of Domiciliation (mainly for Banks and Financial Institutions)
- Provide a Selfie, to verify that the person completing the KYC is the rights holder of the 'account'. - Which we can consider as an 'eKYC' via Digital Biometric Verification.
- AML: has a much broader scope, and is intended more for organizations managing cash flows and includes even more controls:
- Customer Due Diligence (CDD): Assessment of the customer's risk profile, according to the KYC provided.
- Enhanced Due Diligence (EDD): A more advanced procedure (KYC) for high-risk clients (risk of money laundering, or terrorist financing)
- Ultimate Beneficial Owner (UBO)
- Politically Exposed Person (PEP)
In short, as you will have understood, there is a complete arsenal to control all financial drifts. In this article, we will focus on KYC, because it is this kind of control that is required of you (unless you have bad intentions).
Since 2017, KYC (and wrongful and abusive use of the word AML) are applied in the world of Cryptocurrencies. It is during this year in particular, when people invested massively in this financial sector (although this wave of fundraising began in 2016), that the Regulatory Authorities decided to take an interest in where this money was coming from, but more importantly, what it was going to be used for.
At the very beginning (in 2017), KYC were imposed on ICO (Initial Coin Offering) operations, when 95% of them failed, or even worse, were fabricated scams. It was above all to keep an eye on the billions of dollars that were coming in from all over the place and most often ended up disappearing.
That's when it was necessary to regulate all this.
Today we see this word everywhere. But do you know what it's really used for?
Of course, if you listen to the 'Crypto-Anarchists' you won't understand anything: "The Blockchain and Cryptocurrencies are part of a fundamental right which is anonymity." - To legitimize the buying and selling of Cryptocurrencies anonymously.
They are right, they WERE right! But in just a few years things have changed, and as Sam BLACKMORE, CEO of the Bitcoin Vimba investment platform said:
"The truth is that exchanges need a pragmatic approach to enable Bitcoin (BTC) to realize its full adoption potential. Therefore I cannot conceive of a future in which exchanges would not implement KYC procedures in order to survive".
Many people still associate this new form of Currency, but especially Bitcoin (BTC), with scams. This makes a bad advertisement for the Crypto industry, whose message is mainly conveyed by the press. As a result, people are becoming more and more reluctant, which considerably slows down the mass adoption of Cryptos.
Since the Cryptocurrency has gone into 'mass market' mode and has become an investment asset.
KYC are not there as a constraint, but they are there to ensure your protection and financial security! The large majority of the sites/exchanges that impose you a KYC are not able to explain to you the advantages of this procedure, and due to this lack of information, we do not trust this system.
The main objective of the Financial Regulators is to protect you, the customers of these sites/exchanges, as consumers of the financial services offered to you, against:
- Massive Fraud
- Hacking of exchanges
- Pump & Dump ...
It is true that the collection of your personal data (Identity, Address, Selfie ..) goes through centralized KYC services, but these services also have the obligation to secure your personal and private information, within the framework of KYC and GDPR! The KYC must be:
- Secured
- Forgery-proof
- And completely traceable
It is also your duty to do your own research on the KYC system used/proposed by the site you are interested in.
Imagine this small case:
You are a customer of an exchange, you invest a little on various Cryptocurrencies, a new customer appears on the platform, and injects 10 Millions (coming from illegal traffic or for the financing of terrorism), which will undeniably provoke a Pump of certain Cryptos. You feel lucky, you invest a little bit more, thinking that the price is going to go up again, because you may have missed an important announcement or a major innovation, which makes people want to invest, and in a few minutes, the market collapses 'Dump' because the 10 Millions of 'dirty' money are 'laundered' and become 'legal' money, which can be easily withdrawn, so what happens? The market panics, everyone wants to liquidate and limit the breakage and losses, but in any case, you undeniably lose money.
That's how KYC protects you! Against this kind of dubious practices, which in addition to laundering money (and potentially financing terrorism) make you, as a small investor, lose a lot of money.
The Blockchain is decentralized, but for it to be truly useful, it must be able to interact with traditional systems.
Did you also know that nowadays, it has become impossible to open a bank account anonymously! When you deposit funds on an Exchange, or a site that offers financial services in the world of Cryptocurrencies, would you be reassured to know that these sites are empowered, and above all, are able to protect your funds?! So why not reduce the number of sites on which you are registered and which impose a KYC, to be limited to 2 or 3 (the most reliable according to you) and complete a KYC as it should be for your own security (just as you would do in a Traditional Bank).
See you soon
Christophe WILHELM
© Bitcoin Meister
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