Crypto Travel Rule 101

What is KYC in Crypto, and why do crypto exchanges require it?

What does KYC in Crypto mean?

Know Your Customer (KYC) is the first anti-money laundering (AML) due diligence stage. When a financial institution (FI) onboards a new customer, KYC procedures are implemented to identify and verify the customer’s identity. These processes enable financial institutions to assess the customer’s risk profile based on their propensity for financial crime.

(Source: Notabene)

Now that cryptocurrency exchanges and wallet providers are regulated as financial institutions, they must integrate KYC processes into their AML programs.

KYC refers to the process that cryptocurrency exchanges must go through to:

What does the crypto KYC process look like? 

To comply with KYC measures, cryptocurrency exchanges must take the following steps: 

These steps assist financial institutions in determining the risk of money laundering and financial crime involving virtual currencies for each client. If everything checks out, the customer is permitted to engage in certain activities on the cryptocurrency exchange.

What is cryptocurrency transaction monitoring?

A cryptocurrency transaction monitoring system aids crypto exchanges, and FIs identify unusual or suspicious activity that they must report to regulatory authorities and assists law enforcement in tracking criminals. Transaction monitoring observes the risk associated with a cryptocurrency wallet. Virtual asset exchanges use tools provided by companies like Chainalysis, Elliptic, Crystal Blockchain, Coinfirm, etc.

Do crypto wallets need KYC compliance?

Custodial crypto wallets providers are now mandated to perform KYC, as they are regulated as financial institutions.

What are the benefits of Crypto KYC?

Despite any operational changes and challenges associated with KYC regulations, cryptocurrency exchanges stand to benefit significantly from regulatory compliance, including the following:

Can I buy Crypto without KYC?

You can purchase virtual assets without performing KYC through crypto ATMs or decentralized exchanges. Crypto ATMs are kiosks that allow people to acquire cryptocurrencies using cash or debit cards. In contrast, decentralized cryptocurrency exchanges (DEXs) are blockchain-based peer-to-peer marketplaces that facilitate large-scale crypto asset trading between multiple users. DEXs accomplish this entirely through automated algorithms rather than acting as a financial intermediary between buyers and sellers.

What are the risks?

Buying virtual currencies without performing KYC carries significant regulatory risk. Financial regulators such as the U.S. Office of Foreign Assets Control (OFAC) have previously fined cryptocurrency exchanges for apparent violations of multiple U.S. sanctions programs.

Additionally, accounts acquired on the black market could be flagged by a platform as not genuine, consequently jeopardizing the assets. 

Exchanges without KYC

Widely used decentralized exchanges without KYC programs include Uniswap and Bisq. On these platforms, cryptocurrency sellers are matched with buyers based on order prices and volume, adding to and subtracting to a maintained “liquidity pool.” A liquidity pool is a pot of crypto assets utilized to clear purchase and selling orders that appear. End-users provide the assets rather than centralized liquidity providers. 

How is KYC related to the Crypto Travel Rule?

KYC and the Crypto Travel Rule are two terms that are critical in any discussion of crypto-related compliance issues. Simply put, KYC entails collecting and transmitting data on individuals and businesses that use the services of a Financial Institution (FI) or Virtual Asset Service Provider (VASP). In contrast, the Travel Rule entails collecting and transmitting data relating to the counterparty of transactions that a FI or VASP facilitates.

How can Notabene help?

Notabene is a reg-tech compliance SaaS solution that eases the process of Travel Rule compliance, an integral part of AML efforts. Financial institutions and crypto exchanges use our first-to-market FATF Travel Rule solution to identify virtual asset accounts, perform mandated VASP due diligence, and manage regulatory and counterparty risks from one holistic dashboard.

Are you a VASP looking for a Travel Rule solution? Book a demo today. 

FAQ

KYC

What are the advantages of cryptocurrency & virtual asset compliance?

Future business opportunities after complying with the FinCEN Travel Rule are immense. FATF Travel Rule compliance presents the most significant opportunity for virtual assets to become widely accepted in everyday use cases. Cryptocurrency companies that comply will have better access to traditional banking, which will allow easier access to institutional investors. They will also be able to provide more visibility and trust around each transaction for their customers.

What is KYC for Crypto? (Know Your Customer)

KYC is the process of identifying customers and verifying their details to comply with global regulations, including anti-money laundering and counter-terrorism financing laws. The overarching goal of the KYC process in crypto is to prevent individuals or companies from using the asset class to commit financial crimes. 

What is the difference between KYC and Travel Rule?

KYC is the process of one VASP identifying their customer and verifying their details to comply with global regulations before allowing them to utilize their platform. Travel Rule takes it a step further–requiring two VASPs that have already KYC’ed their customers to exchange and store customer PII on transactions over a certain threshold. 

Is KYC safe in Crypto?

Know Your Customer (KYC) is not only safe but critical to secure crypto transactions. Without KYC, it’s impossible to verify the parties of a transaction and avoid fraudulent scams due to anonymity. While Notabene does not directly provide KYC, our Wallet ID widget executes an integral part of the KYC picture.

Why are AML and KYC important in the crypto industry?

Anti-Money Laundering (AML) and Know Your Customer (KYC) enforcement benefit VASPs and their end-users. Unlike fiat currency, virtual currency as an asset class does not have a solid regulatory framework. Some bad actors increasingly take advantage of transmitting and hiding the source and destination of their financial transactions. Standardizing regulatory practices and performing KYC and AML checks can help mitigate money laundering, terrorist financing, and illicit financing.

Why choose Notabene for crypto compliance?

VASPs and Financial institutions looking to comply with the Travel Rule leverage our market-leading FATF Travel Rule solution to identify virtual asset accounts, perform mandated VASP due diligence, and manage regulatory and counterparty risks from one holistic dashboard.

Book a demo today.

Does Notabene handle KYC?

Notabene does not specifically touch KYC. However, Wallet Identification is one part of the KYC process. When an originator customer intends to send a transaction over the Travel Rule threshold, our wallet identification widget checks to see if the beneficiary is a VASP or a non-custodial wallet. Additionally, Notabene’s Counterparty Wallet ID Plugin allows originator VASPs to perform non-custodial wallet ownership verification.
Book a demo today.