Identity verification in crypto exchanges and the purpose of it


A lot of trading platforms require mandatory identity verification after registering an account. If you don’t complete this step, you will be prevented from using most of the platform’s features.

Verification procedure is a must on cryptocurrency exchanges due to the requirements of regulators in different countries. When the user undergoes verification, he or she must provide a scan of their passport, take a selfie and submit additional documents, such as their domicile, if requested by the trading platform.

This helps to identify the account owner, so as to mitigate a variety of risks and build trust in the exchange. 

KYC and AML

There are some distinctive identity authentications designed for trading platforms. They are essential for monitoring transactions within a unified system.

KYC

KYC stands for Know Your Customer, referring to the process of confirming the identity of a company’s customers before they are given access to transactions and other activities. As a result, it is possible to get rid of fraudsters, terrorists as well as create a common database of counterparties.

The main actions of exchanges:

  • Evaluating large transactions.
  • Gathering data about the person, their citizenship.
  • Checking for illegal activities.
  • Tracking asset input/output addresses.
  • Detecting questionable money and cryptocurrency transfers.

Those who do not have the right to conduct legal activities (for example, minors or users with a criminal record) are rejected at the registration step. Additionally, the data obtained from the database is used to solve crimes.

AML

AML rules were introduced in 1989 by the Financial Action Task Force (FATF), an intergovernmental organization. All of the rules are focused on anti-money laundering and imply that trading platforms are:

  • Analyzing transactions of $10,000 or more;
  • Reporting some types of transactions to regulators;
  • Monitoring the customers of financial institutions;
  • Recognizing and seizing the illicitly acquired funds;
  • KYC/AML differ in scale. While the first one runs at the individual level to assess risks, the second one goes global, ensuring that transactions are thoroughly monitored to curb financial crime.

The importance of being verified on exchanges

The verification is vital to evade stumbling across anonymous accounts, including covering up crimes and fraud by means of the blockchain. ID verification ensures a safe room for transactions as well as for the users themselves.

In late 2021, according to Chainalysis, an analytical platform, the fraudsters were able to generate $7.7 billion in revenues over this year. These funds were not withdrawn from the system, but rather were run through dozens of mixers, to make sure that the source of the funds could not be traced. Therefore, any crypto wallet can hold compromised assets.

In order to avoid this, platforms implement a verification procedure. In the early days of crypto, it was basically optional. But as time went on, the problem of fraud deepened. That is why verification is now a widely accepted legal practice.

Both top EU-registered exchanges and other organizations located in jurisdictions with less rigorous rules require identity-based accounts as a way to function within the same legal framework.

Numerous businesses were compelled to switch to a verification process, so as not to lose the solvent audience from countries with tight regulation, namely the U.S. and the European Union. Once identity check was introduced, more opportunities opened up for these companies to scope out their activities. 

The verification procedure on a crypto exchange

Multi-level identity proofing offers the possibility to set different limits for operating on the platform. The initial level of verification on the crypto exchange requires little information, but the higher the daily trading volume and customer activity, the more detailed the form must be filled out on the website.

A key aspect of verification is checking your personality and confirming your place of residence. You must provide correct information and scans of documents. If it turns out to be fraud, false information or poorly readable scans are provided, the check will not be passed.

The main KYC document for individuals is a national ID (passport, driver’s license, etc.). In the case of large investors, you may need to know the origin of your assets.

When you fill in the application form on the website, you must:

  • Enter full name, date of birth, contact e-mail, phone number, full address.
  • Take a selfie holding the documents, send a photo of the utility bill with the place of residence.
  • Submit the application through two-factor authentication (codes from SMS and e-mail).

Conclusion

Being verified has benefits both for users and for digital asset exchange platforms. This procedure provides a high-quality financial security and aids in detecting fraud and clandestine activities.

AML-compliance ( verification of cryptocurrencies ) links wallets with illegal transactions. In this way, the analysis helps to return stolen funds to their owners. Thus, it enhances the credibility of digital assets and mitigates the actions of regulators.

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