Ensuring the security of our financial resources and assets has become more and more important in our increasingly digital society. Because of that, a series of measures have been put in place relatively recently to prevent unlawful activities on the internet. Collectively known as KYC or Know Your Client, these measures are designed to validate the identity of individuals who wish to participate in trading within the market. You might have encountered this verification process before, as it is now routine practice in banks, financial establishments, and businesses.
KYC serves a twofold purpose, benefiting both the entity and the client. The client provides their personal information with the trust that their advisors will consider suitable investment options. On the other hand, the financial institution gains a clearer understanding of the appropriate investment portfolio to offer their clients.
Beyond this, KYC also plays a critical role in monitoring transactions and deterring potential illicit activities, such as money laundering and the financing of terrorism. As a result, adhering to KYC procedures is crucial for businesses to comply with regulations like Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT).
For a number of years, KYC has been a standard practice within financial institutions, and for many, it has become mandatory. In this article, we will delve deeper into the mechanics of this procedure and outline the typical requirements associated with it.
In the current financial landscape, any account linked to financial matters and securities is required to undergo a KYC (Know Your Client) verification process. This practice was introduced in 2012 with ethical considerations in mind and was grounded in the principles outlined by the American Financial Industry Regulatory Authority (FINRA).
Within this framework, two significant rules were introduced, namely Rule 2090 and Rule 2111. The former is centered around the dynamic between the broker and the customer. It mandates the maintenance of comprehensive records containing essential information about the client. Additionally, the broker must be informed about any third parties who granted access to the client's account.
The two rules combine to emphasize sustainability. While closely aligned with Rule 2090, Rule 2111 zeroes in on the broker's role concerning the client's financial matters. It establishes the broker's responsibility to ensure that investment decisions are rooted in a thorough understanding of the client's portfolio, culminating in enduring financial gains.
These rules were instituted in accordance with the 2001 USA Patriot Act, which mandated financial institutions, particularly banks, to conduct comprehensive verifications of their clientele. While various countries have introduced their own distinct verification systems, many of these models draw inspiration from the U.S. framework, given the predominant influence of the U.S. dollar in global markets.
In the process of confirming your identity, the procedures can differ and typically depend upon the specific bank, financial establishment, or company in question. Nonetheless, there are certain commonly encountered requirements, including:
Institutions generally request a combination of these items. A prevalent combination consists of a photographic ID, driver's license, and proof of residence, though this can vary depending on the particular institution's policies.
In addition, these institutions are obligated to investigate their client's financial circumstances. Often, clients are required to furnish supplementary information such as age, tax status, expenses, investment history, employment situation, net worth, and risk tolerance.
This array of data serves a dual purpose: it equips the bank with insights to tailor their offerings to the client's needs and also facilitates a comprehensive background assessment of the client.
While KYC primarily caters to individual traders, its counterpart, KYB or Know Your Business, serves as a verification method for companies. This practice extends beyond banks and financial institutions, finding application in businesses seeking partnerships with other enterprises.
KYB functions as a pivotal anti-money laundering (AML) and counter-terrorist financing (CFT) mechanism employed by companies to avert engagement with enterprises involved in unlawful activities.
The verification process is typically executed by validating the authenticity of a company's information and procuring diverse documents from credible sources. These documents provide comprehensive insights not only about the company's clientele but also about its management and shareholders.
Given the potentially time-intensive nature of providing such extensive information, the KYB process has undergone digital transformation. Many businesses establish their AML compliance through electronic identity verification (eIDV), a method that grants them expedited access for subsequent interactions.
The integration of KYC (Know Your Client) procedures within the realm of cryptocurrencies has sparked a contentious discourse, highlighting the different opinions concerning its necessity. While not yet universally mandated, a significant majority of cryptocurrency exchanges now demand KYC compliance. A handful of exchanges may still offer crypto trading without KYC, but this freedom is increasingly constrained.
The source of this quandary can be traced to a conflict between decentralization and the imperative to align with regulatory frameworks. The past association of cryptocurrencies with illicit activities and the underground market prompted many exchanges to adopt KYC protocols to safeguard their reputation. Furthermore, as the cryptocurrency markets grew into a billion-dollar industry, the absence of regulation became unsustainable.
Adding to the complexity of this debate is the absence of a unified global stance. Nations have collectively realized that cryptocurrencies have transcended their original conception as mere "digital money" to emerge as valuable assets. However, by and large, each country formulates its own distinct rules and protocols.
In the European Union, the recent implementation of the AMLD6 (Anti-Money Laundering) directive has exerted pressure on cryptocurrency exchanges to embrace KYC. Trading cryptocurrencies for fiat currencies without KYC verification has been rendered illegal in Europe, with potential legal repercussions including up to four years of imprisonment.
The United States maintains even stricter regulations. KYC verification is mandated for all crypto transactions, overseen by entities like FinCEN (U.S. Financial Crimes Enforcement Network) and the SEC (Securities and Exchange Commission). Similarly, Canada has classified crypto exchanges as financial institutions, subjecting them to KYC requirements.
Asia showcases a diverse array of regulatory approaches. On the one hand, China has instituted an outright ban on all cryptocurrencies, while South Korea advocates robust AML and KYC protocols. Thailand necessitates identity verification for crypto acquisitions, and Singapore's approach leans more toward public education than augmenting regulations.
All in all, the landscape of cryptocurrency rules and regulations is fluid and characterized by perpetual evolution. For those seeking involvement in crypto trading, the wisest course of action is to study the prevailing regulations within their jurisdiction. Current regulatory information for your region can be found here.
While all of these rules and regulations perhaps appear intrusive and complex, they play a vital role in countering corruption, fraudulent activities, money laundering, and terrorism.
These verification protocols establish a shield against fraudulent activities, defending companies from unwarranted involvement in illegal undertakings. For customers, KYC serves as an assurance that their investment portfolio is vigilantly managed and their exposure to investment risks is held at a minimum.
Within the Ping Exchange platform, KYC procedures are seamlessly integrated through CorePass — an advanced compliance, digital management and login tool built on the Core Blockchain. Upon completing the KYC process within CorePass, unlimited access to all Core platforms is granted, thereby negating the need for recurrent identity verification.
By employing advanced cryptographic mechanisms, CorePass guarantees the secure storage of your information, rendering it immune to cyber threats. Access to this information remains exclusively within your domain unless you choose to grant third-party access explicitly. Furthermore, CorePass exhibits compatibility with centralized ecosystems beyond Core's environment, streamlining the KYC procedures in banks and other financial institutions.
In sum, KYC, despite initial appearances, emerges as a robust mechanism that fortifies the financial landscape against cyber threats. Through CorePass, Ping Exchange offers a secure and convenient avenue to navigate the complicated waters of modern identity verification.
SO-FIT is a self-regulatory organization approved by the Swiss Federal Supervisory Authority financial markets (FINMA) for the supervision of financial intermediaries referred to in Article 2 paragraph 3 of the Swiss Federal Law concerning the fight against money laundering and the financing of terrorism in the financial sector (AMLA).
