What are AML and KYC Checks and Why Do Crypto Exchanges Need Them?

Bitcoin AML KYC ID trading platforms

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Anyone who’s signed up to a major Bitcoin exchange recently will be aware of the hoops you need to jump through to verify your identity before you can start trading.

This includes giving your full name, address and phone number, together with supplying a copy of your identity document, such as a driving licence or passport.

Some sites also ask you to take a selfie as an additional verification measure.

So why do Bitcoin exchanges and other crypto financial services within the cryptosphere need your ID?

And is it safe to upload your personal information to these platforms whose offices are often located in another country?

Why do I have to verify my identity and home address?

Companies involved in crypto – or any other financial service for that matter – must comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) laws.

Why? Well, it’s all about reducing opportunities for money laundering and the ability of criminals to move the proceeds of their nefarious activities around the globe hidden from authorities.

It’s also about preventing people from being able to buy illegal goods, such as drugs or weapons, from the dark web anonymously.

Another reason of course is tax. If Governments can’t keep tabs on people’s crypto transactions, then they can’t tax them, meaning they’re losing out on huge amounts of revenue.

Additionally, many exchanges now have reporting obligations to tax offices around the world, including Her Majesty’s Revenue and Customs (HMRC) in the UK.

The regulations are also there to help fight fraud by ensuring a person is who they say they are.

This reduces the ability of people to impersonate others or create bogus identities in order to set up trading accounts.

Despite all this, there are some who would argue that rules are simply about control and keeping ever closer tabs on the population’s activity.

It’s worth remembering that rules or no rules, most Bitcoin transactions are not anonymous and can be tracked.

What’s the difference between KYC and AML?

KYC, Know Your Customer, and AML, or Anti-Money Laundering, are not really different as such, rather they are part of the same set of regulatory rules that companies must follow.

KYC is actually part of AML, which is a catch-all term for the procedures companies – including mainstream crypto exchanges and financial providers – must have in place to verify the identity of those signing up for their service.

There are various components involved in the KYC process.

Aside from verifying your ID, as we’ve mentioned, clients are also asked to state the source of their funds (such as salary, savings or inheritance) during the onboarding process.

Some companies also use KYC to assess a prospective client’s risk profile, which includes how well they understand the financial product they’re planning to buy.

This is more common with share dealing services and brokers, but is becoming increasingly common into the cryptosphere, which makes sense given the risky nature of crypto investing.

AML represents the broader umbrella rules which govern how financial companies tackle criminal activity, primarily money laundering.

Is it safe to share your ID online with a Bitcoin exchange and should I be worried?

If you need to share your passport, driving licence or other identity document online to comply with KYC and AML rules, you must ensure you’re dealing with a reputable company.

Bitcoin and the world of cryptocurrency is effectively unregulated meaning the potential for your personal data to be exploited or stolen is much higher than when you’re dealing with mainstream financial services providers.

That said, the reputable exchanges, such as Coinbase, take security incredibly seriously and go to great lengths to preserve their reputation as a safe place to transact.

This means keeping customer data safe and out of the hands of criminals or those who would exploit it in some way.

Many crypto platforms use third-party companies to verify your identity when you sign up, and they too are obliged to follow strict rules about how your data is used and how long it’s stored for.

It’s right to be wary when dealing with less-well known and poorly reviewed crypto companies, but your details are as safe as they are with any mainstream financial services provider when you’re dealing with the major players.

That said, it seems no company is completely bulletproof, and even mainstream banks and financial services providers have seen customer data compromised by hackers.

Do all crypto exchanges need ID?

It used to be the case that you could sign up a wide range of crypto services without ID, but this is no longer true.

All reputable crypto exchanges and related services, such as interest bearing yield accounts, require you to verify your identity to comply with AML/KYC regulations.

There are a number of places where you can still buy Bitcoin and crypto without ID or AML/KYC checks as you’ll see in the next section.

Are there Bitcoin wallets and exchanges that don’t have KYC and AML checks

You can still find crypto exchanges and other peer-to-peer services where you can buy and trade Bitcoin without revealing your personal information.

I’m not going to give you any recommendations here because the validity of some of the sites that operate outside of the mainstream crypto stream can be questionable.

In terms of what cryptos you can buy without ID, the answer is pretty much all of them depending on where you look.

A Google search will give you hundreds of results but make sure you do your due diligence before parting with your cash.

Search for reviews and user experiences, together with threads on Reddit and other social media channels.

This should give you enough information to make an informed decision.

If you do decide to use these services, it’s very much a case of buyer beware.

Legitimate reasons to want Bitcoin anonymously

Remember, even though crypto is still largely unregulated the whole sector is becoming far more mainstream.

As a result, many companies are choosing to abide by the same rules that govern traditional financial institutions.

Aside from following AML/KYC procedures, this means providing absolutely clarity about their management structure, financial backers and, most importantly, how your crypto is secured.

There are completely legitimate reasons why a person might wish to purchase crypto anonymously.

For example:

  • If you’re very wealthy you might not want information about your crypto holdings falling into the hands of criminals.
  • Equally, companies who’ve bought Bitcoin may wish to keep this information away from the prying eyes of competitors.

But it’s only going to get harder to buy Bitcoin anonymously as Government regulators close in on the sector forcing platforms who offer this service to shut down.

Disadvantages of anonymous Bitcoin transactions

If you’re keen to keep your Bitcoin transactions private, this in itself may arouse suspicion.

In some countries, if you start searching for services that facilitate anonymous crypto transactions it can send up a red flag.

Remember, very few crypto transactions or cryptocurrencies are absolutely anonymous.

You never know if at some point in the future a transaction by someone else will connect the dots back to you.

Another disadvantage is that it’s likely you’ll pay more for your crypto if you go through an anonymous service, and the whole process is more complicated, especially if you’re unfamiliar with how crypto works.

If I have to give ID to buy Bitcoin, how can I protect my privacy?

There are various steps you can take to keep your transactions relatively private, although not from dedicated crypto forensic investigators.

For example, you can:

  • Use a new Bitcoin wallet address for each transaction you make
  • Use a VPN service while conducting transactions, or anonymise your transactions using a Bitcoin mixer (although this in itself can be risky)
  • Transact with a so-called privacy coin, such as Monero (XMR)

Conclusion

While it is possible to buy Bitcoin and other cryptocurrencies without ID, it requires a certain degree of technical knowledge and brings with it additional risks and cost.

As Bitcoin increasingly enters the mainstream the rules that govern traditional financial transactions will be more widely adopted – or forced upon – the crypto sector.

Crypto purists will say this goes against the founding libertarian principles of Bitcoin as a method of payment designed to free people from the prying eyes of the state and provide a secure means of transacting anonymously for the millions of unbanked around the world.

But whether you like it or not, increased state scrutiny means changes are afoot in the cryptosphere and it will become increasingly regulated in the not too distant future.

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Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice.

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