KYC (Know Your Customer) is a set of measures aimed at establishing the identity of customers. It is used mainly in the financial industry as part of anti-money laundering and countering the financing of terrorism.

History

In the traditional financial sector

In 1989, the Financial Action Task Force on Money Laundering (FATF) was established. This group developed a set of recommendations to combat money laundering and terrorist financing. These recommendations included requirements for banks and other financial institutions to identify customers and verify the source of funds.

In 1994, the EU approved the Anti-Money Laundering Directive (AMLD). This directive established relevant, common standards for all EU member states, including on the conduct of KYC procedures.

In 2018, the EU adopted the Fifth Anti-Money Laundering Directive (AMLD5), which strengthened KYC requirements for financial institutions and extended the requirements to the crypto industry.

In the crypto-financial sector

In 2014, the U.S. Securities and Exchange Commission (SEC) issued guidance requiring compliance with anti-money laundering and anti-terrorist financing rules from various financial institutions, including cryptocurrency exchanges. Major cryptocurrency exchanges in the US, such as Coinbase and Gemini, began implementing KYC procedures after the SEC issued the guidance.

In 2017, China banned ICOs (initial coin offerings), which led to tighter regulation of cryptocurrencies in the country. Many Chinese exchanges were forced to cease operations or adopt organizational changes and implement KYC procedures, as the major Chinese cryptocurrency exchange Huobi did.

In 2018, the European Union adopted the Fifth Anti-Money Laundering Directive (AMLD5), which established new requirements for financial institutions, including cryptocurrency exchanges. This led many European exchanges, including Binance and Bitstamp, to begin implementing KYC procedures.

In 2020, Russia passed a law on digital financial assets, which sets rules for cryptocurrency transactions. LocalBitcoins and other exchanges began implementing KYC.

Content of the KYC process

KYC process requirements for crypto exchanges can vary by country and regulator, but in general they include the following steps:

Customer Identification — the provision of personal data by the customer, typically including first an last name, date of birth, residential address and contact information.
Identification of Identity — the provision of proof of identity by the customer. This is usually a passport or driver's license.
Address verification - the customer provides a document that proves their residential address, such as a utility bill or bank statement.
Risk Analysis — the crypto exchange examines the information provided and analyzes the risks associated with each client. Based on the results of the analysis, a decision is made on the possibility of opening an account or providing services.
Transaction Monitoring — after opening a client account, the crypto exchange monitors and analyzes all of the client's transactions. If any suspicious transactions are detected, it reports to the relevant authorities.
Data Storage — crypto exchanges store all information about customers and their transactions on the exchange for a certain period of time to allow for audits and investigations if necessary.

In addition, crypto exchanges may impose additional requirements and procedures, such as two-factor authentication or verification of the source of funds, depending on their security policies and regulatory requirements.

KYC in TON

@Wallet

In TON Wallet, the KYC procedure is required to access express cryptocurrency purchases or the purchase of cryptocurrency using a bank card.

Going through the procedure consists of two steps:

Verification of an identity document. It can be a passport, driver's license or residence permit.
Liveness check, for which you will have to turn on the camera and show your face. This is a biometric check aimed at verifying whether the person trying to register is alive or a static image.

Verification message in @Wallet
Request for a national ID card in @Wallet

The verification is done by Sumsub, a company that provides biometric verification in one minute.

Conclusion

Financial institutions, services or companies create KYC procedures that contain all the necessary steps to verify their customers. In addition to this, KYC helps services to assess, monitor and address any risks. Once a business or community (in case of decentralized platforms) can ensure that its customer is really who they claim to be, it eliminates the possibility of a cyberattack by that user. It also helps them prevent terrorist financing, money laundering or any other illegal financial schemes.

Generally, the KYC process involves verification of identity, facial recognition, documents. All banks, stock exchanges and other financial institutions have to comply with anti-money laundering and KYC regulations as they are charged with the responsibility of KYC compliance. The KYC process also helps companies avoid financial penalties imposed by regulators as well as reputational damage. Since the financial sector is always at risk of financial fraud, crime and attacks, identity checks help mitigate fraudulent activities.

The introduction of KYC processes in the crypto industry has provoked criticism from the community due to fears of loss of anonymity and privacy, but it is worth noting that these requirements apply mainly to services designed to implement broad financial interactions — trading, currency exchange, etc. Many solutions (e.g., non-custodial crypto wallets and decentralized platforms) that do not involve KYC but have all the basic functionality for using cryptocurrencies remain available to users.

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