KYC is one of the most controversial subjects in today's crypto world. The number of ICOs requiring KYC verification is growing day by day. For this reason, it's essential to have a clear understanding of this procedure. In this article, we'll take a closer look at KYC/AML regulations so that you don't feel like you're in uncharted waters anymore.
KYC stands for "Know Your Customer". It's the process of identity verification of the customer. Each backer is supposed to pass the KYC procedure and provide their credentials in order to participate in the ICO. This is a necessary measure to ensure that the ICO projects are doing business with legitimate entities.
How KYC works? The procedure is simple: a backer needs to send a scan copy of their passport (ID or driver's license for the US citizens) and make a selfie (holding the document in their hands). This allows to avoid a fake identity or using a duplicate account. Sometimes, the confirmation of residency or other documents may be required.
The term AML (anti-money laundering) refers to a set of policies, laws and regulations aimed at combating generating income in a fraudulent way. This concept is broader than KYC. Let’s picture the following scenario: if an ICO project has a strong KYC during the token generating event – it’s a sign of legitimacy for banks. It means that such project won’t find it difficult working with banks and following AML regulations. There’s a direct link between these two procedures.
Let’s look at ICOs in a global context. KYC and AML regulations differ from country to country. Some states, like China and India, are not allowed to join ICOs according to local laws. The US has their own peculiarities. The latest reports inform that the US Securities and Exchange Commission is going to prosecute ICOs that were held without KYC procedures.
The key benefits KYC offers to the table
The idea behind KYC may seem counterintuitive at first glance. However, we shouldn’t jump to conclusions. On the one hand, KYC undermines one of the key principles of the crypto world – anonymity. On the other hand, it ensures transparency of transactions, and this is the most important thing. It guarantees that the token sale is legitimate.
Here are the main advantages that come with implementing KYC:
preventing scammers from participating in ICOs for malicious purposes;
combating criminal acts (money laundering);
ensuring safety of investors’ assets;
avoiding legal, tax and reputational issues;
establishing credibility with banks.
At ICOAdmin, safety of our clients and customers is our top priority. With this in mind, we've made our dashboard KYC/AML compliant. Specifically, it has a KYC module – the CMS-integrated compliance solution that collects information about customers (in the back office of the dashboard). It allows our clients to review information about their backers and decide whether to accept or decline token purchase rights for selected participants based on legal compliance. At their will, we can refer our clients to trusted third-party services to execute the validation or they can do it by themselves.
Traps and pitfalls of KYC to be wary of
For obvious reasons, most backers want privacy and have no desire to show their documents to anyone. They take KYC as an additional barrier to enter the ICO, which poses a lot of risks. The biggest threat among of them is data leaks. Backers want their IDs to remain secure by all means, but the online world is not as safe as we want it to be.
Bear in mind that KYC procedure can occur at different stages:
before purchasing tokens – quite a popular option;
before registration – a very rare option;
before the output of tokens – the most tricky option. If refund happens, the project defines by itself how to execute it right.
To successfully pass the KYC procedure, it’s highly recommended to carefully study KYC/AML regulations of the specific ICO project in advance. With ICOAdmin – a provider of fully-customized software solutions – you can get KYC compliance support on whatever stage you need.
When it comes to anti-money laundering, implementation of KYC for ICOs is critical. It aims to minimize the number of criminal acts and ensure the safety of token sales. Figuratively speaking, it’s a protective measure for ICО projects and their backers allowing them to run business in a transparent way. The stakes are high, and what we really need is trust.