What is the 'KYC' protocol and why it is the key to the blockchain ecosystem?
1. Introduction.
As a lawyer professionally engaged in blockchain consulting, I must point out that one of the most important things for a real and legitimate crypto project is the initial identification of its users. You know that regardless of whether you use the service of a crypto exchange or simply register a hosted wallet (online wallet) on a given platform, you are always required to identify yourself as a person. This is the automatic technological protocol "know your customer" (from English "know your customer" or "KYC"). It, together with the other key protocol for laundering dirty money (known as "AML" from the English "anti money laundering") are normatively mandatory for every legal crypto project, and this view was laid down in the recommendations that DANS recently published on the topic.
KYC operations have evolved from a rudimentary process into a strict and meticulous practice overseen by the regulatory authorities of every EU member state, including the US. In the past, the manual (paper) and digital KYC process was not cheap, fast and customer-friendly, with large financial institutions spending close to $500 million annually on the KYC process. KYC regulations are becoming increasingly strict around the world, so these costs are expected to rise gradually to staggering amounts.
Therefore, the main objective of this presentation is to clarify how the introduction of blockchain can improve the KYC verification process by making it more secure, cheaper, faster and more convenient. A recent thematic analysis was conducted based on the European banking and fintech industry, using expert interviews and analysis of previous studies. The study revealed that aspects such as communication, source of information, document validity, compliance, GDPR, time consumption, customer dissatisfaction, high workload, inaccuracy, lengthy document retrieval process and lack of automation make the current paper-based KYC process obsolete and bad for business.
The annotated study also showed how an improved blockchain-based KYC verification process could remove all limitations of the current system. Barriers to implementation such as legal risk, resistance to change, trust issues, customer education, employee training, job cuts, energy consumption, etc. were also identified and discussed. Key ways to overcome the challenges were also identified in the impact analysis section of the study. Finally, several recommendations were made regarding the adoption process, such as the use of automation, a common blockchain standard for KYC, conducting a pilot project, cooperation between banks and financial institutions, training customers and employees, and research and development on the topic.
2. Essence of the problem.
Here we have to admit that we all have gone through the process of online identity verification by submitting photos of our documents and/or scanned copy to the bank, e-commerce platforms or even social networks.
This process is called KYC. What is the meaning of KYC and what does KYC mean. As I already mentioned in English this term means "know your customer". This is a feature that online platforms such as banks, social media and e-commerce websites, including blockchain sites and crypto exchanges use to have the personal data of all their customers in order to provide high security fraud protection.
This online security is based on the logical fact that a thief, fraudster or hacker will do anything to hide their identity. This security measure has actually been in place since the 1900s, when banks began requiring customers to open accounts using their real names, and in modern times it began to be used again in Internet banking in the early 2000s.
With the rise of internet, this security check was introduced in social media and e-commerce platforms etc. to protect you from fraudsters. I wrote this article after a lot of research on the internet about "what is KYC", "what does KYC mean" and how does "Cryptomus KYC" work, in order to protect your assets.
3. Basic settings for KYC.
Since you are already aware of what KYC stands for, you might guess that it is actually a technological process that banks, investment firms and crypto firms use to verify the identity of their customers in order to prevent fraud, money laundering and various types of cyber threats that you may face as a user.
To better understand what KYC is, first you need to understand what is 'KYC protocol compliance' and what is 'KYC process'. KYC compliance is the process of collecting the following information about customers:
* Name;
* Address;
* Date of birth;
* Nationality;
* Profession;
* Source of income;
* Financial actives.
For this you need to follow the KYC process (protocol) which consists of providing all your information and identity documents such as passports, driving licenses, bank statements, origin of money etc. These documents are checked for authenticity and to ensure that they match the identity claimed by the customer and to identify the origin of the cash flows. Once they are approved, the customer's account is activated and he can access the services of the given blockchain project.
4. What does KYC mean in cryptocurrencies and crypto exchanges?
Now that you already know what KYC is and how it works as a protocol, we will deal with the question of what is KYC in cryptocurrencies, what is KYC verification when trading cryptocurrencies through a blockchain exchange (crypto exchange), and what is KYC in blockchain in general.
So what is KYC in cryptocurrency trading? This is the process of verifying the user's identity, which is carried out at the time of his registration in crypto exchanges and related services in order to prevent fraud and money laundering. This protocol as a technological measure involves the provision of personal information, which is then verified usually by scanning and verifying official documents. In this context, KYC helps crypto firms maintain the integrity of their operations and comply with legal regulations for the identification of each user, complying with the GDPR as well as with the aim of preventing money laundering. Here I would like to point out that in most professional blockchain projects, going through the KYC protocol and the AML protocol (the one for preventing money laundering) are two separate things as a technological measure. This means that the user goes through two separate procedures according to the two protocols, and separate low-level programming is done for them, with the user's individual statements of will being correctly marked in different blocks of the chain, in order to verify the final result - his identity.
5.How to pass KYC protocol successfully?
Understanding what a cryptographic document is about KYC and knowing how to pass it are different things. Why? Because each platform has its own methods, image size, information, document type, etc. The first step was to understand what KYC verification is in crypto trading. Now let's see how to pass it:
"Cryptomus" is one example of a crypto platform that requires KYC. To pass the KYC check in Cryptomus, you will need to provide your personal information, name, address, phone, number and email address. You will then need to take a photo and upload your document for review on the platform and take a selfie. After submission, you will have to wait for the verification process to complete as we have explained below. How to work in "Cryptomus":
- Go to the dashboard;
- Go to settings;
- On the left, look for KYC personal Wallet;
- Click on "Check";
- Submit your document and take a screenshot of your face;
- Wait for the confirmation;
- Once the confirmation is done, you will be able to fully use all the functions of "Cryptomus".
I gave an example with a specific KYC platform, but keep in mind that every crypto project functions in an identical way for your individualization. Here I would like to point out that if a blockchain project does not have KYC and AML protocol, you can be sure that it is 99% a scam.
6.Types of KYC verification levels.
Now that you know how KYC verification is done and what KYC is in cryptocurrency trading, let's see the different levels of KYC verification:
- Simplified KYC Verification (SDD). This level of verification is intended for low-risk customers and requires only basic information such as the customer's name, address and date of birth;
- Simple identity verification (CDD). This level of verification is for medium-risk clients and requires more detailed information, including the client's occupation, source of income and financial assets;
- Enhanced KYC Verification (EDD). This level of verification is for high-risk customers and requires additional information such as the beneficial owners of the customer company, political exposure and source of funds. For natural persons – profession, source of income, annual tax return in some cases, etc.
7. The importance of KYC in cryptocurrencies as a financial and legal instrument.
Talking about what KYC is in the blockchain financial sphere without mentioning its technological features is meaningless. As it became clear, this protocol closely supported and actually at the technological level led to the verification of the AML protocol, which is related to money laundering. These two protocols are actually low-level vessels in the code, as the programmatic lack of KYC and verification of the blocks that concern this procedure also leads to a lack of AML - in short, AML cannot technologically begin without KYC being finalized.
On a slightly more global level, the KYC protocol is vitally important to protecting the cryptocurrency financial ecosystem. It helps prevent fraud and money laundering, verifies national GDPR regulations, and builds user trust in blockchain systems, protecting against crime and terrorism. Cryptocurrency exchanges use KYC not only to verify the identity of users, but also as a business tool to ensure the attraction of new customers by ensuring the security of their data and investments.
7.1. KYC programming.
In today's digital age, know-your-customer (KYC) protocol has become a key aspect of various industries, especially in finance and online blockchain services. KYC involves verifying the identity of individuals to ensure regulatory compliance and reduce the risk of fraud. Practice shows that most KYC solutions are programmed in the "Python" software language, which greatly streamlines the KYC process. That's why:
7.1.1. Data collection and validation:
Python provides a vast array of libraries and frameworks that simplify data collection and validation. Using tools like "Requests" to process HTTP requests and "BeautifulSoup" to collect data from websites, KYC data can be efficiently collected from multiple sources. Additionally, Python's rich ecosystem allows the integration of APIs to automate the extraction and validation of information from government databases or third-party identity verification services.
7.1.2. Facial recognition and biometrics:
Python offers several libraries for facial recognition and biometric authentication, such as OpenCV and dlib. These can be integrated into KYC systems to improve identity verification. Through facial recognition, the system can compare the user's image or photo in real time with the image on their ID document, providing an additional level of security.
7.3. Natural Language Processing (NLP) for document analysis:
KYC often involves analyzing documents such as passports, driver's licenses or utility bills. Python's natural language processing (NLP) capabilities provided by libraries such as NLTK or spaCy can be used to extract relevant information from unstructured text. This enables automatic document parsing and extraction of key data points, thereby improving the accuracy and efficiency of the KYC process.
7.4. Machine learning for risk assessment:
Python's extensive machine learning libraries, including scikit-learn and TensorFlow, can be used to develop risk assessment models. By analyzing patterns and historical data, these models can help identify potentially fraudulent activities during the KYC process. This proactive approach helps maintain a secure and compliant customer onboarding process.
7.5. Interfaces with "Flask" or "Django":
Creating user-friendly interfaces is essential for effective KYC processes. Python web frameworks like Flask or Django allow developers to build robust user interfaces. These interfaces can be designed to guide users through the KYC process seamlessly, providing a positive user experience (which is important to keep the user in the system and leave the system before KYC is finalized) while collecting the necessary information checking.
8. Legal and regulatory requirements for KYC.
I should note that KYC is a regulatory requirement (in Bulgaria by the National Revenue Agency and the National Tax Service) for crypto companies and crypto exchanges in order to prevent fraud and money laundering. It includes customer identity verification, monitoring of financial activity, detection, reporting and sanctioning of suspicious behavior. Failure to comply with these regulatory requirements leads to fines and, in some more severe cases, even criminal charges for the respective blockchain operator. Statistics from recent years indicate that arms, drug and prostitution money is constantly being laundered through the crypto industry. Organized crime has now turned to the crypto casino sphere, giving a platform to all these illegal practices, as very often most casino blockchain projects do not have AML and KYC protocols implemented and this leads to easy access to the platforms in question by criminals who launder money through them from illegal activities.
9.Benefits and purposes of KYC compliance.
KYC compliance is an important process for businesses that can help reduce the risk of fraud, money laundering and ensure regulatory compliance. For blockchain companies, this means:
* Reduction of costs for identification of legal entities, users of a given crypto project;
* Improved reputation and trust and users;
* Technical adequacy, speed of services and software security.
On the other hand, for customers it is thus provided:
* Protection against fraud and fraud;
* Access to a wider range of products and services;
*Online security, speed of services, accuracy and transparency of legal transactions.
As I already mentioned, the lack of KYC in a given blockchain project certainly speaks of unprofessionalism or an open manifestation of criminal intentions – in most cases, financial fraud on a particularly large scale.
10.Challenges and concerns of the KYC implementation.
The implementation of the KYC protocol is crucial for crypto businesses, with the aim of guaranteeing the interests of customers, preventing fraud, money laundering and complying with the regulatory framework in detail. Challenges include programming and protocol development costs, technological complexity of KYC software solutions, privacy and anonymization, etc. The solutions to the described problems go through the implementation of the latest blockchain technologies, expert partnerships, training of personnel, correct and visual instruction of the customers on the use of the service, with the aim of data security, tools for signaling the law enforcement authorities, etc.
All these models must be strictly followed by crypto companies and startups in the blockchain ecosystem, cryptocurrency exchanges and crypto investment intermediaries, as strict adherence to KYC protocol leads to the prevention of major blockchain fraud and money laundering. This includes collecting and verifying customer identities, but also monitoring for suspicious and criminal activity and reporting to law enforcement. It is through compliance with KYC regulations that crypto exchanges and other blockchain companies can truly protect their investors by complying with the personal data regulatory framework of the relevant jurisdiction. Ignoring, failing to implement, or not complying with the KYC requirements discussed at length in this article can result in severe civil, administrative, and criminal penalties for computer crimes.
Author: Mr.Atanas Kostov - blockchain attorney
More information on creating documentation for KYC and AML protocols for your blockchain business can be obtained by email This email address is being protected from spambots. You need JavaScript enabled to view it. or phone +359888915215.