What is KYC and Why is it Important?

October 14, 2021

Almost every banking and other financial institutions nowadays require KYC for their users. Crypto platforms are no exception to KYC verification. Although many users feel annoyed or concerned that their privacy is at risk, there are reasons why KYC is mandatory. So, what is KYC? In case you’re not familiar with the term, KYC stands for Know-Your-Customer, which is the mandatory process of identifying and verifying the identity of the user when opening an account and potentially periodically overtime.

The KYC laws were first introduced in 2001 as part of the Patriot Act, which was enacted after 9/11 to provide a variety of means to prevent terrorist activities. KYC is mandatory for many financial institutions and banks. Failing to comply will result in penalties and potential reputational damage. According to research by Fenergo, approximately $26 billion in fines have been imposed for non-compliance with Anti-Money Laundering (AML), Know-Your-Customer (KYC), and sanctions regulation in the last decade.

Why do We Need KYC, and Why does it Matter?

KYC exists to help financial institutions make sure their customers are real and prevent illegal activities and frauds. The intention here is to know your users—verifying their identities, making sure they’re real, ensuring they’re not on any prohibited lists. It is also to assess their risk factors, which can keep money laundering, terrorism financing, and unknown fraud schemes away. It is important to do it in a way that is effective without penalizing innocent users, or being so complicated that people can’t comply with them and hence can’t use the services.

With KYC verification, a company can better understand its users and better mitigate risks. Although the actual verification steps might differ depending on the company, the KYC process typically involves proof of identification, proof of address, and other relevant information as deemed necessary.

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Prevent Illegal Activities and Frauds

KYC in the Cryptocurrencies World and at Hodlnaut

It may seem like another bureaucracy burden and an unnecessary hassle to make KYC mandatory. Besides, it defeats one of the main principles of the cryptocurrencies world–anonymity. However, it goes back to the argument that without KYC, it is easy for bad actors to misuse the system and use cryptocurrencies as a financial instrument to conduct illegal activities.

At Hodlnaut, KYC verification is required for all users before depositing their assets with us. Besides preventing the aforementioned, we do KYC to meet the requirements of the Monetary Authority of Singapore (MAS) as we are a Singapore-based company. All users, whether existing or new, will be required to provide or update the KYC. After you’ve created and verified your Hodlnaut user account, the next step is to start the KYC verification process.

What Documents to Provide

The most common and essential documents for submissions are proof of identity and proof of address. With Hodlnaut, you’re required to provide:

  • Personal Information
  • Full Name, including aliases
  • Place and date of birth
  • Nationality
  • Gender
  • Local mobile number
  • Passport and Identity Verification (through Onfido)
  • Photo of your passport
  • Live video or photo
  • Employment Information
  • Employer name
  • Approximate annual income
  • Occupation and industry
  • Residential Address
  • Residential address (full street level)
  • Recent address proof (utility bill, bank statements)

KYC can be a “hassle” to begin with and can be time-consuming; however, it is essential to combat illegal activities and establish credibility with any financial institutions. The process has important implications for users and essentially any institution or company that deals with the financial transaction has implemented some form of KYC procedure. The process can be quick or slow, depending on how well you follow the instructions. It is always recommended to read the guidelines carefully and submit up-to-date documents for verification to save time and effort.

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