Overview of KYC/AML Laws

Criminals and terrorists have long sought out ways to legitimize their money so they can apply it toward their goals. Money laundering describes the process by which these groups hide the ownership of their money and pass it through several sources until it has the appearance of legitimacy. The criminals are looking to disguise the original source and cover their tracks as they engage in transactions all over the world. Due to the mostly unregulated aspect of cryptocurrency, many are concerned that suspicious financial activities will thrive there.

Numerous countries and companies are trying to regulate cryptocurrency transactions to prevent money laundering and are applying a number of KYC (Know Your Customer) and AML (Anti-Money Laundering) laws and requirements to various entities in an attempt to be more vigilant in preventing criminal and terrorist financing.

History of Regulation

The idea of money laundering is nothing new, as profiting from black markets, bribes, extortion, and more has always been a priority for those who wanted to remain hidden from the law, tax-collecting governments, and enemies. Money laundering is a descriptive term for taking “dirty” money from a criminal source and passing it through enough layers of financial transactions so it appears “clean.”

For the United States, many of the modern money laundering regulations and laws came into effect in the early 20th century. Countries around the world have their own laws and they work together on an international scale to prevent suspicious activities.

As criminals develop have more sophisticated methods of hiding their money, these laws have extended to all kinds of areas, such as casinos, insurance companies, and merchants. Cryptocurrency is just the latest development to come under scrutiny for anti-money laundering laws and enforcement.

Cryptocurrency and KYC/AML

If there is an exchange between fiat currencies and virtual currencies, the entities facilitating the exchange are required to comply with various KYC/AML regulations. However, there isn’t clear regulation at the moment for exchanges between different virtual currencies. That doesn’t mean cryptocurrency exchanges are a free-for-all of criminal activity. Instead, each individual company takes it upon themselves to perform their due diligence to conform with common-sense KYC/AML requirements.

Many experts believe that it’s only a matter of time before governments across the globe will implement laws and directives upon cryptocurrency exchanges that require them to comply more closely with KYC/AML checks and balances.

What is KYC (Know Your Customer)?

Know Your Customer is an identification process that requires entities to determine the true identity of their customers. In traditional financial transactions, entities like banks are required to ask about the source of income, the nature of the business and verify a customer’s identification, for example. Typical verification might include proof of citizenship, utility bill, other bank statements, and photo ID.

While this verification may cause headaches for legitimate customers, it’s an excellent way to protect the entity from liability.  This in turn protects legitimate customers. Under these laws, an entity is required to report suspicious transactions to authorities, as well as any individuals or groups that they cannot verify or whose purpose is unproven.

Many digital currency exchanges are joining in to help prevent money laundering through their channels. For example, they may ask users to send a clear digital photo of them with a photo ID. Other cryptocurrency companies still do not have any methods of KYC in place.

What is AML (Anti-Money Laundering)?

Like KYC, Anti-Money Laundering or AML is the series of steps outlined by laws and regulations that entities must take to avoid money laundering activities. A financial or economic entity seeks to work with legitimate people and businesses instead of those who want to clean up their dirty money. They take steps to avoid these transactions as well as identify and report suspicious activities.

When it comes to virtual currency transactions, anonymity is both a benefit and a challenge.  While many legitimate people and companies like the privacy benefits of crypto, this feature also increases the risk of terrorist financing and money laundering. Regulation will likely become more strict to ensure that security measures are in place to decrease illegal and unlawful exchanges.

The Future of Cryptocurrency and KYC/AML

Traditional economic and financial institutions are required to comply with various KYC/AML laws, nationally and internationally. Governments and financial institutions require compliance for participation. But the attractive thing about cryptocurrency exchanges is that there is ideally no third-party interference in the transfer of coins. The innovation of cryptocurrency appeals to many precisely because of lighter regulations.  However, it stands to reason that any financial system should not facilitate illegal activities.

Increasingly, countries and governments across the world are enacting KYC/AML laws for cryptocurrency systems, like the United States, United Kingdom, South Korea, Japan and the European Union. As cryptocurrency grows in popularity, accessibility and value, it’s expected that more financial institutions and world governments will keep a close watch and take steps to enact more KYC/AML laws to avoid criminal and terrorist activities.

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