What Is KYC and Why Is It Needed? 2024 Guide

What Is KYC and Why Is It Needed? 2024 Guide

In today’s digital world dominated by social media culture, anonymity has become a long-forgotten concept. The digital age has brought with it the need to constantly be online and while things like smartphones and instantaneous access to the internet have made our lives infinitely easier, that comfort has come at the expense of privacy.

In the financial world, anonymity isn’t really possible either since international agreements between major nations and financial institutions have led to the development of the KYC process. Essentially a tool to fight against corruption and money laundering, it has become an integral part of the sector.

To understand this better, let’s take a more detailed look at what KYC actually is.

What Is KYC?

What Is KYC?

KYC stands for ‘Know Your Customer’ and is a process that financial institutions use to verify their customers and have all their information on record. The international nature of things like tax evasion, money laundering, and financing of terrorism has led to a need for all banking and financial transactions to be tracked and verified to a degree.

By using the KYC process, these institutions have a mandated means of acquiring all their customer’s essential information to verify their identity and link them to their transactions, should the need arise.

The process is usually backed up by regulation at a local level to enforce compliance. Most countries have sophisticated regulatory bodies and legislation that mandate all banking and financial institutions collect and store their customers’ information. This includes information like full names, social security and identity numbers, proof of residence, bank statements, and employment information.

Gathering documentation as proof of this information and storing it on record provides stability and transparency. While this process can be an arduous one for customers who have to provide all the documentation and the institutions who have to bear the cost of administering it, smaller institutions usually subcontract the process out to other agencies that specialize in them.

On the other hand, with digital systems now being used, the process has become streamlined to ensure a less onerous burden is placed on the customer.

How Cryptocurrency Changed KYC

The digital age has turned the global financial sector on its head, with innovations like cryptocurrencies being a game changer. Cryptocurrency, apart from its investment potential, offers a distinct benefit since it runs on blockchain technology which helps keep transactions anonymous and immutable. This means that some businesses using crypto may not need to implement KYC processes.

For example, the rise of the iGaming industry has led to many online casinos adopting cryptocurrency as a payment method. Augmenting the benefit of privacy is the fact that there is now such a thing as no KYC crypto casino such as one at InsideBitcoins, which means both a person’s transactions and their identity and personal information can remain anonymous. Given how little opportunities people have for privacy these days, it’s obvious why this concept is steadily growing in popularity.

Cryptocurrency transactions don’t require KYC processes since they are essentially anonymous. In its regular application, KYC processes force customers to provide a host of personal information about themselves in order to access the services of financial and banking institutions.

Nevertheless, the KYC process is still an important one that has many benefits that help protect customers and society at large from a variety of issues that would abound without it. While crypto doesn’t require KYC, let’s take a look at a few key sectors that do mandate KYC compliance.

Sectors that Are Mandated to Use KYC Processes

Sectors that Are Mandated to Use KYC Processes

The most significant industries that the KYC process affects are the banking and financial sectors. Given the kind of services major banking and financial institutions provide, there is of course an understandable need to have control and transparency over transactions.

Without the KYC process of collecting and storing customers’ details, criminals, unscrupulous companies, and individuals would have free rein to commit fraud, use the industry to launder money, and hide other forms of illicit transactions such as those that further international terrorism and trafficking.

Other sectors that fall under KYC regulations are real estate, lending companies, gaming companies, art dealers, online casinos, and financial advisors. Each of these industries carries with them an inherent threat of financial malfeasance and criminal activity and, therefore, usually follows rigorous standards to ensure KYC processes are adopted and utilized.

The Implementation Process

KYC Processes

KYC processes are used for both large and small customers but can incorporate a ranked system that dictates how in-depth the information collecting and monitoring functions in terms of it have to be followed. Smaller customers are usually deemed low risk and therefore may only need to initially provide all relevant information and documentation to ensure compliance.

On the other hand, high net-worth customers and large companies have to undergo a more rigorous process. These customers will usually also be subject to an ongoing monitoring process and continuous follow-ups on their activities to ensure they remain above board at all times.

The sophisticated nature of the international banking and finance industry (including FinTech) means that checks and monitoring for high-value clients and transactions can be far more onerous. These are, however, necessary since financial crimes like money laundering have become vastly more sophisticated themselves and are constantly evolving new methods to evade the scrutiny that KYC checks use.

It’s certainly easy to see why KYC is important since the IMF estimates that money laundering alone accounts for between 2 and 5 percent of the global GDP annually. Furthermore, the entities that facilitate it now account for between $1.5 and $4 trillion a year that is lost to such activities.


Know Your Customer (KYC) Policies

All major banks, financial institutions, and other select industries like online gambling are usually mandated to follow Know Your Customer (KYC) policies. This helps them confirm and verify the identities of their customers and provides a record of all of their activities.

While there is a trade-off that, by its nature, vitiates privacy, since it requires customers to provide all information and documentation linked to their identities, the KYC process is nevertheless a vital one.

KYC is crucial to ensure illicit activities like money laundering, funding of terrorism, and tax evasion are curbed. While it is good to have such processes, some customers still prefer privacy. For specific industries like crypto online casinos, KYC policies can be overlooked.


What Is KYC?

KYC stands for ‘Know Your Customer’ and is essentially a range of checks that banks, financial entities, and other sectors are mandated to perform on their customers. It provides them with crucial information about their customers to establish transparency and oversight over their activities.

Why Is KYC Necessary?

Why Is KYC Necessary?

KYC plays an integral role in curbing financial crimes and other illicit activities at an international level. Some common crimes that KYC helps protect against are tax evasion, money laundering, and the funding of terrorist activities.

What Information and Documentation Need to Be Provided for KYC Checks?

Personal information such as names, social security and identity numbers, addresses, and bank statements must be provided to institutions regulated by KYC policies.

Which Industries Need to Perform KYC Checks?

Banking and financial institutions, real estate corporations, art dealers, some online casinos, and gaming companies require KYC checks. In some instances, online casinos that utilize cryptocurrency as a method do not require KYC checks since Cryptocurrency transactions are, by design, secure and anonymous.

How Are KYC Policies Enforced?

Industries and jurisdictions falling under KYC policies are usually regulated by legislation. Institutions that do not comply may face penalties or fines, and in extreme cases, may have their trading licenses and permits revoked for non-compliance. From a business POV, institutions that seek to sidestep KYC policies may themselves become blacklisted by those that do.

How Are KYC Policies Implemented?

The burden of implementing and paying for the administration of KYC policies falls on the individual institutions regulated under them. For smaller institutions, to curb such costs, these processes are usually outsourced to specialized agencies that do it for them.

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