Why is KYC Essential for Crypto Exchanges?

Crypto exchanges — marketplaces that enable consumers to buy and sell cryptocurrencies — require Know Your Customer (KYC) measures to prevent financial crimes such as money laundering and terrorist financing, which can have serious consequences for both individuals and society as a whole.

Crypto exchanges are tasked with combating many types of fraud, as the Sumsub Identity Fraud Report illustrates. A few of its key findings include:

• A significant portion of identity fraud (55.8%) occurs in just five countries, with the United States accounting for 5.1% of cases.
• E-sports had the highest rate of fraud incidence at 2.9%. In 2022, both the crypto and banking industries saw a significant increase (nearly two-fold) in identity fraud.
• Payment fraud also increased by 40% in that year. ID cards were the most frequently forged document type, and the majority of forged documents (79%) featured male personas.
• Finally, the report noted that deep fakes, which are artificial intelligence-based media that mimic real people, are becoming more advanced and popular.

There are three main types of KYC measures that crypto exchanges can employ to counter the aforementioned issues.

1. Identity verification: Verifying the identity of an individual or organization by checking their government-issued identification documents, such as a passport or driver’s license. This helps to prevent identity fraud and ensure that the exchange is dealing with legitimate customers.
2. Risk assessment: Evaluating the risk that a particular customer or transaction may pose to the exchange. For example, an exchange may assess the risk of a customer being involved in money laundering or terrorist financing.
3. Ongoing monitoring: Continuously monitoring customer activity to identify any suspicious behavior or transactions. For example, an exchange may flag a customer who is making large or unusual transactions, or who is using multiple accounts. This helps to detect and prevent financial crimes in real-time.

Crypto exchanges require KYC measures to ensure complete crypto compliance with AML and CTF regulations and to prevent financial crimes such as money laundering and terrorist financing. These measures help to protect both the exchange and its customers and are an important part of maintaining a safe and secure financial system. Another important aspect of crypto AML compliance is to ensure the KYC provider ensures the highest level of consumer protection as any sort of data leaks eventually jeopardize the verification process.