“What Exactly Is KYC?”

 

Understanding your clients has the capacity to help enhance your reliability as a company or platform. This basic idea goes by the name ‘KYC’, a term you will encounter time and again in the investment industry. While some exchanges don’t necessarily require this principle, it is common enough for it to be a standard in most financial sectors.

 

What does it mean? Why is it important?

 

KYC is an acronym for ‘Know Your Client’ or ‘Know Your Customer’. This is a standard that ensures investment advisors are aware of detailed information concerning their clients’ risk tolerance, financial position, and knowledge in investments.

 

KYC provides protection for both clients and investment advisors. The clients’ protection means having their investment advisor know suitable investments for their personal situations. Investment advisors are protected by understanding what they are allowed to include in their client’s portfolio. KYC compliance normally involves necessities and policies like risk management, transaction supervision, and customer acceptance policies.

 

The Know Your Client/Customer rule is important at the start of every customer-broker relationship. It establishes the important facts of each customer before making any suggestions. The chief facts are those required to correctly service the customer’s account and to be mindful of any special instructions for handling the account.

 

Banking and financial industries are among the most complex sectors when it comes to customer relations. They constantly face various risks concerning money laundering and financing malicious activities. The process of KYC banking is no different than the one used in other industries. However, high-security standards ordered by legislation are different from those that are mandatory in other sectors.

 

Relation to crypto

 

Cryptocurrency has been praised for its decentralized nature and for acting as a medium of exchange that promotes confidentiality. With that said, these benefits also introduce several challenges in thwarting money laundering.

 

Criminals view cryptocurrency as being a way to advance their illegal activities and as a vehicle for money laundering. This has led to governing entities seeking out new ways to enforce KYC on cryptocurrency markets. Moreover, they want to make it a requirement for cryptocurrency platforms to verify their customers; not unlike other financial institutions. It is not yet mandatory, but many platforms have gone through with KYC practice implementation.

 

Exchanges are labelled as either fiat-to-crypto or crypto-to-crypto. Since crypto-to-crypto exchanges rarely deal with traditional currency, they do not face the same pressures to employ KYC standards as exchanges dealing with fiat currencies do.

 

Fiat-to-crypto exchanges conduct and simplify transactions that involve fiat currencies and cryptocurrencies. Seeing as how fiat currency is the nation’s official currency, most exchanges of this kind employ KYC to a certain extent. Fortunately, financial institutions should have inspected their clients in accordance with KYC requirements.