Know Your Customer (KYC) and Anti-Money Laundering (AML) Compliance in Crypto


KYC means “Know Your Customer” is a common practice for financial institutions, in which they undergo a series of steps to ‘know their customer’ before allowing them to open a new account. KYC and CDD which stands for “Customer Due Diligence”, these terms usually go together and are fundamental for every entity to comply with its anti-money laundering (AML) regulations.

Although, KYC is mandatory obligation for all the financial institutions; KYC is also required in other industries such as Jewellery, Real Estate, Casinos and Gambling and Insurance Industry. 


The history of KYC in the cryptocurrency industry is closely tied to the rise and fall of Liberty Reserve, a digital currency platform that was founded in 2006. Liberty Reserve enabled users to transfer funds with minimal identity verification and oversight. It quickly became popular with cybercriminals and money launderers looking to exploit the lack of controls to conduct illegal transactions. 

Crypto asset providers were brought under AML obligations relatively recently. Now, these newly regulated entities need to implement KYC/CDD like traditional financial institutions (even though this is against the whole idea of crypto). Implementing KYC/CDD in the crypto industry is very challenging.

The Financial Action Task Force (FATF), in October 2021, issued an updated “Guidance for a risk-based approach to Virtual Assets (or “crypto-assets”) and Virtual Asset Service Providers” (or “crypto-asset service providers”). The guidance provides clarifications on what constitutes a “virtual asset” and a “virtual asset service provider” to enable countries and entities to identify which crypto-related activities fall under the scope of AML regulations.

The guidance shows how different are the activities of crypto asset providers compared to the activities of traditional financial institutions and how the FATF recommendations can apply to these crypto-related activities. These ML/TF risks related to crypto-related activities need to be considered by a crypto provider before deciding the level and implementation of KYC/CDD.


The KYC process aims to prevent fraud, money laundering, terrorist financing, and other illegal or illicit activities. KYC helps financial institutions comply with CDD and anti-money laundering (AML) regulations under the applicable laws.  

Some, but not all, crypto companies are considered ‘financial institutions’, and therefore, subject to applicable Central Bank’s regulations. These are companies operating as money transmitters—meaning they convert fiat currency such as the US dollar to cryptocurrency such as Bitcoin. As such, a KYC program is the best way to fulfill their legal obligation.  

The KYC process for crypto companies involves a series of steps to verify their customers’ identities and screen them for illicit activity before they can access their exchange or wallet, or another crypto platform. This can include collecting and verifying the few following information:

  • Name
  • Address
  • Date of birth
  • Government-issued identification documents

If a new customer is considered suspicious, they may be subject to Enhanced Due Diligence (‘EDD’). This is an extended form of KYC that collects additional information such as the source of funds, information on their business, and information on hidden owners/stakeholders known as ultimate beneficial owners (UBOs), who may be hidden by shell companies.


Implementing an effective KYC process in the crypto industry comes with its own set of challenges. The decentralized nature of cryptocurrencies and the pseudonymous nature of blockchain transactions can make it difficult for exchanges to identify and verify their customers.

Additionally, the constantly evolving regulatory landscape further complicates the KYC requirements for crypto businesses. Failing to establish robust KYC measures can result in reputational damage, regulatory penalties, and increased exposure to financial crimes.

In spite of these challenges, many crypto exchange platforms are mandating KYC procedures to open the account of the customers.


The best practice for verifying the Customer and onboard the Customers on the Platform is set out as under:

1.     Collection of Customer Information;

2.     Verification the information and risk rating;

3.     If the customer is suspicion; then

4.     Collection of additional information;

5.     Verification of Additional Information provided; and

6.     Transaction Monitoring.

Nowadays, there are a lot of technologies such as Artificial Intelligence, Big Data, and Machine Learning which offer a wide variety of supports to assist developers in fortifying their  KYC onboarding procedures. 

Manual-oriented processes are typically slow. But with the help of automation and (AI) artificial intelligence, these processes have become much quicker and more efficient. Also, the scope of manual error or manipulation is reduced.

In addition to that, Crypto Companies usually have to deal with complex and critical data. Now, suppose you consider humans to filter, analyze, and conclude a solution from these complex data. In that case, it will take an eternity and still won’t guarantee a hundred percent accuracy and reliability.

If the same process is being carried out by fast, efficient, and accurate software, you will be able to save money and valuable time.

Artificial intelligence can identify patterns of transactions, anomalies & behavior rapidly, allowing the AML compliance professionals to invest their time better analyzing the results, collaborating the findings with other financial institutions, and investigating root causes. and valuable time.

The use of technology is not restricted merely to transaction monitoring. Big data has helped business enterprises move away from simply tracking financial crime at the transaction level but enabling connections to detect the pattern in the voluminous data.


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