One of the significant problems associated with the modern financial system is the ability to use it for the purpose of illegally obtaining money, as well as their exchange and money laundering. This also includes various corruption schemes and fraud associated with tax evasion. And something had to be done with this.
That is why many regulatory organisations were created - the US Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Action Task Force (FATF). In addition, many countries have enacted various laws regulating financial activities and complicating their illegal use. Examples include the US Bank Secrecy Act (1970), the Anti-Money Laundering Act (1986), and the Patriot Act - the USA PATRIOT Act of 2001.
As a result, a complex set of measures was developed, which all accredited financial organizations must comply with. And its main elements were Anti Money Laundering (AML) or Anti-Money Laundering, and Know Your Customer (KYC).
What is KYC?
The basis for this practice was the 2001 Law on Patriotism. The bottom line is simple - financial institutions are required to collect data about their customers. From the earliest stage - verification of the required identity of a potential client. However, since the exact criteria for this verification have not been established, they may vary from bank to bank. The following documents usually require:
- Passport with photo
- Driver's license
- Social Security number
- Voter Identity Card
- Other documents
Then follows the verification of the customer address. Most often - a copy of the lease, or copies of utility bills. This is necessary in order to make sure that the address indicated by the client coincides with his actual address of residence.
But the KYC procedures do not end there. Banks have the right to submit requests to customers for confirmation of a fact indicated during the creation of an account. Customer transaction track also adding to it.
What is AML?
In fact, this is an automated check to see if data on specific banking users is included in government blacklists. That means - analysis and processing of data received from KYC. Plus additional identity verification, tracking of sources of income and comparison with taxes paid.
Usually, it is carried out using special software, so we can talk about maintaining the confidentiality of client data. Not to mention the fact that the chances of leakage of such information are minimized.
How does this compare with cryptocurrencies?
Actually there is no connection. The fact is that most cryptocurrency exchanges do not go through official licensing, so they are absolutely not obliged to comply with official recommendations on contending money laundering. Moreover, due to decentralization, it is extremely difficult to deal with them by legal methods. Except, of course, the method used in China - a complete ban on such financial interactions in private.
Nevertheless, if the exchange simultaneously works with both crypto and fiat currency, it must already comply with some legal requirements. Therefore, many online exchanges voluntarily collect data about their customers. It’s also because, in general, both AML, and KYC are quite effective practices in countering financial irregularities.
The problem is that these practices cancel the main advantages of cryptocurrency - anonymity and confidentiality. And effective adaptation of AML software to the functionality of cryptocurrency exchanges has not yet been developed. However, work in this direction is initiated. But here everything is tied to the legal regulation of cryptoeconomics, and with this, most countries of the world still have huge problems. However, if this problem can be solved, it will immediately increase the attractiveness of the cryptocurrency from the point of view of large financial market players. But for now, these are only plans for the near future.