Whether you're buying cryptocurrencies, investing in blockchain companies, or your blockchain company performs an Initial Coin Offering (ICO) - all of these situations would require a Know Your Customer (KYC) processes.
KYC is part of the Anti Money Laundering (AML) acts, and vary from country to country. Usually, it takes quite a long time to perform a solid KYC process including a lot of manual steps. Not being compliant with these regulations could result in major business risks and penalties. Therefore a blockchain company, whether it’s providing an exchange service for cryptocurrencies or runs an ICO, should have a good captain and a great crew to sail its company safely through all the various requirements.
This article provides an overview of what KYC is, and why it is so important. Furthermore, it explains how blockchain companies that perform an ICO could navigate safely in the KYC ocean while remaining compliant.
Check out the sailing area (What is KYC?)
The KYC process is a requirement by AML acts with the objective to reduce the risk of illegal transactions, money laundering or financing terrorism. It includes regulations on how customers should be identified, and how the identity information should be verified. It also includes further requirements for companies to perform background checks such as sanctions lists or politically exposed persons.
The most obvious KYC process that almost all people go through, is opening a bank account. For most of the banks, a customer needs to go into a branch and bring their identification documents. The banks then perform background checks, and make a decision based on a calculated risk score for the customer.
In the world of decentralised ledgers and global blockchain solutions, the KYC process should be performed in a way that is electronically supported in a convenient way for the customer and legislation compliance is simple for blockchain companies. The customer’s personal information should be handled carefully and remain highly secure between all involved parties.
To do this, the KYC process must be differentiated between natural person (e.g. private customer) and legal person (e.g. company). The KYC process for on boarding a natural person usually consists of three major steps:
1. Customer Identification
2. Customer Due Diligence
AML legislation usually differentiates between face-to-face, video and online customer identification. The most convenient way for the customer would probably be to perform an online identification. For this, the customer doesn’t need to schedule an appointment and can do it whenever he or she likes to do it.
The KYC legislation requirements for customer identification can be quite different from country by country. However, the bottom line is that it needs to be checked whether the customer registering is the person that he or she claims to be. Therefore, the basic process usually would be to identify the customer and verify the customer identification information.
An example of an electronically supported customer identification process for a natural person would be the following:
There are countries like Switzerland that require additional steps for the customer identification such as liveness detection.
A professional sailor would never start sailing into a new area without checking the ships security equipment first. Security equipment helps in critical and emergency situations. As for due diligence, the security equipment represents background checks and internal policies and guidelines.
Part of due diligence requires multiple background checks of the customer to be performed. The main ones require confirming if the customer appears on a national or international sanctions list. Organisations also need to confirm if the customer is a politically exposed person (PEP). In order to do that, it needs to be ensured that the data source for the lists is always up to date. Furthermore, the definition of PEP varies from country to country.
In additional to that, a standard customer due diligence potentially wouldn't be enough and an enhanced due diligence needs to performed as well. That includes further process steps, and requires additional information from the customer.
Based on the customer identification and due diligence, a risk score will be determined and will be the basis for the decision. Similar to a sailing yacht, the captain needs to give clear commands to the crew. That would include internal policies and guidelines, what is an acceptable risk score for a customer in regards to money laundering, financing terrorism etc. A clear decision should be made if the customer is accepted or denied based on the risk score.
Ready to hoist the sails!
All blockchain companies that are required to perform KYC processes for their customers (e.g. a cryptocurrency exchange) or investors (e.g. running an ICO), need to set a up a good crew. The crew should include experts that have experience or have sailed in the KYC ocean already. That would also include partner lawyers that know legislation requirements for specific areas, and partners that provide solutions to support the KYC process.
The mentioned steps are only an excerpt of the KYC on boarding processes required, based on the AML legislations. KYC is also only one piece of AML, and there are further processes and controls that might need to be covered - such as the customer’s transactional behaviour and monitoring of transactions, but also ongoing customer due diligence and screening.
The KYC process should be as easy and convenient for the customer as possible with as minimal human interaction as possible. The following steps are a starting point for the journey:
1. Understand what the AML and KYC requirements are for a company within the relevant countries
2. Get experts (such as lawyers and partners) involved
3. Get ready for AML and KYC compliance
The requirements for AML and especially KYC can be quite complex, and therefore it is recommended to get experts on board. Once your company is AML compliant, it will help to navigate the company safely through the KYC sea and avoid high business risk and penalties.
How can SingleSource help?
SingleSource is a blockchain-based identity service and decentralised fraud risk scoring platform. SingleSource offers a customer identification and due diligence solution that supports companies to become KYC compliant, in an automated way with minimal effort required by the customer. It supports the KYC process by verifying the customer’s identification information, performing background checks and calculating a risk score based on the customer's information.
SingleSource gives the end user control over the use of their risk score data and enables organisations to contribute data securely to make better decisions when providing services to customers, jointly eliminating fraud on a global scale, and enabling good customer behaviour to be rewarded.
You can find out more about how SingleSource works in action by requesting a free online demo with our team.