If you’ve never heard of KYC, you’re not alone. Still, it’s a pretty big term in banking and finance these days.
KYC stands for “know your customer”, – and know your customer standards and policies are front and center for most financial businesses in the age of cryptocurrency and things like online banking.
The need for KYC emerged as the development of cryptocurrency and blockchain assets began to knock down some of the traditional obstacles to moving money in certain ways.
For example, many blockchain assets allow people to move money in practically anonymous ways. Without traditional bank verification, there is no need for the kinds of legwork that payment facilitators did in the previous era of fiat money. Now, people refer to these processes as frictionless transactions or permissionless trading, but regulators found that there is a need to have people’s identification data on file. Otherwise, all kinds of crime and fraud can result.
So experts thought about ways to safeguard new finance systems, and the need for KYC was born. Regulators and other parties started asking banks and finance companies to put KYC standards in place, so anonymous people didn’t get away with all kinds of financial crimes. In fact, the regulators weren’t asking – they were ordering! Some exchange operators and brokers have gotten in legal trouble for skipping KYC implementations, and the financial world has gotten the memo.
KYC and AML compliance also serves these finance companies in other ways. Banks and finance companies want to know their customers – they want to know what’s going on in their networks and whether they are dealing with people who have dubious financial reputations. Those tools are resident in many banking networks, as the security and identity verification communities work on developing better outcomes for businesses.
So, KYC came on the scene and continues to emerge as a best practice everywhere. For finance pros, it’s common lingo. And they know the best practices for making sure businesses are KYC-compliant.
How Do Companies Institute KYC?
There are lots of ways for banks and finance companies to implement KYC into networks. Most of them have to do with aggregating and storing identification data.
For example, if someone is trading bitcoin on an exchange, bitcoin doesn’t care who they are or what their identity is. They may be acting anonymously.
So, the bank or finance company collects their identity information as part of their onboarding to the platform. That way, the bank knows who’s trading – for example, trading between fiat and crypto money – and they have this information to report as necessary – for example when a financial crime has occurred. The IRS wants this data, too, because the agency is asking people to self-report crypto gains – and they don’t want to just take the investor’s word for it!
A common setup for KYC compliance looks like this. Typically, banks and finance companies will set up a web form to let new users register for a particular exchange or brokerage. That screen or form will contain detailed identification information. In some cases, the major cryptocurrency exchanges even ask people to upload their driver’s license or other identification data to know who users are.
The Promise of Online Banking
In a way, KYC goes along with online banking as a modern practice. Online banking brings the transparency of real-time financial information to depositors and customers.
In the old days, people had to manually balance their checkbooks, looking at the amounts of money they deposited and spent and trying to come up with a resolved balance.
That is obsolete now, though some old-fashioned depositors still choose to do business that way. Secure online banking environments let people see what they have in their account at any given moment and what they’ve spent on which purchases.
In other words, online banking was the original game-changer, and then KYC came along and enhanced what companies could do online. Secure brokerage and exchanges with KYC have it both ways – they give the right information to customers, and customers give the right information to them. Everybody wins.