What Is KYC?

4 mins read March 10, 2023

At one point or the other when opening a bank or registering for internet services you have been provided with a form either virtually or in person. On this form, you are asked to fill in your name, address, occupation, and some other personal details which can sometimes be frustrating and stressful.

If you have ever had to go through this at one point or the other, then you have definitely gone through a KYC process. Although this process might seem plain annoying and stressful, it is necessary for you and the firm to protect yourself and your assets.

What is KYC?

KYC is an acronym for "Know Your Customer" or "Know Your Client." KYC is a mandated process of identifying and validating the client's identification when opening an account and on a periodic basis.

KYC is conducted in compliance with existing Anti-money laundering (AML) legislation. A person who fails to meet the minimum KYC requirement may be denied the opportunity to own an account.

KYC Terminologies You should Know

eKYC
eKYC is an acronym for Electronic Know Your Customer. It is a process of using digital means or the internet to verify the identity of clients.

KYCC
KYCC stands for Know Your Customer’s Customers. It focuses on identifying not only your customers but also those their activities, interests, and relations. KYC helps assess their risk levels and the risk level of those they identify with that is, if they have any relations with persons involved in fraudulent activities.

KYB
KYB is an acronym for Know Your Business. It is important for firms to verify the identity of the business organisations they are transacting with, e.g., a restaurant or hotel. It involves verification of licensing, location, to check if the firm has a history of criminal activity such as corruption, terrorism, or is operating illegally.

How KYC works

KYC involves various steps with the focus being to verify the customer’s identity, review their activities to confirm the source of funds is legitimate, and access the money laundering risk associated with the transaction with that customer.

The process involves requesting for the customer’s details and a binding document that verifies the identity of the customer. Some KYC involves bio-metric capture, Video identification and ultimately running security checks.

Why KYC is Important

1. For the Company:

Fraudulent persons may use false information to siphon funds or create dummy accounts to perpetuate their fraudulent actions. KYC ensures that stolen IDs or false IDs are not used to create an account.

KYC helps prevent identity theft, money laundering, and other financial crimes by verifying the customer's identity.

Financial institutions are tasked with anti-money laundering regulations and failure to comply may incur hefty penalties. This might pose a risk to the customer as the company assets may be frozen making it difficult even for the customers to access their funds.

KYC helps establish trust between the client and the firm which is essential for credit unions and loaning platforms. KYC allows the financial institution to confirm the identity and address of the clients and confirms the customer has a legitimate source of funds to repay the loan

2. For the client:

Often the importance of KYC to customers is often ignored, but KYC is just as important for their protection.

KYC creates a secure and trustworthy relationship with the firm to conduct financial activities. The knowledge that the firm is compliant with KYC certifies that your funds are safe and the company is not involved with criminal activities that can put your funds at risk.

KYC compliance is also important for cross-border payments, and collaborations as it facilitates a greater level of trust while ensuring that your funds are secure. You can be assured that persons you are transacting with within the firm are compliant with KYC.

KYC and Cryptocurrency

Cryptocurrencies are popular because of their decentralized nature, which allows users to operate independently of a central authority. However, because cryptocurrencies are frequently used for illicit activities such as money laundering, this feature has often presented concerns.

Because they are dealing with traditional fiat currency (naira, shilling), crypto exchanges that facilitate trade from fiat to crypto must adhere to KYC laws. FinCEN proposed in 2021 that cryptocurrency companies must comply with KYC laws by gathering customer information and confirming their identity. For example, due to a lack of effective KYC, crypto firm, BitMEX, was charged with regulatory infractions, prompting a $100 million settlement with regulators.

Enforcing KYC compliance helps to tackle malicious activity such as such as ransomware assaults, which locks down a computer or network until the user pays a ransom. In fact, in one of such ransomware assaults, users had to pay nearly $350 million to crypto attackers. With KYC, the attackers would not have had the anonymity to escape with their funds and would have been brought to justice.

In fact, the KYC requirement burden lies heavily on the crypto exchange, which has to bear the financial burden of setting up a KYC process that is seamless and effective. However, with eKYC, the KYC process has been smoother than before, with KYC verification completed in a matter of minutes or hours.

Although it may appear cumbersome, KYC is crucial in protecting users' assets and security. It's important to verify the customer's identity and also to protect their security and their assets.

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.