KYC: The foundation of compliance in financial services and the crypto sector

2025-12-21 21:14:39

The Origins and Importance of KYC in Financial Regulation

The KYC ( “Know Your Customer” or “customer knowledge” ) is one of the pillars of global financial regulation. Long before it became standard practice, it was in 1989 that the Financial Action Task Force (FATF) took the initiative to structure the fight against money laundering on an international scale. This institution has established strict standards and formulates recommendations that member governments and jurisdictions must implement through their own anti-money laundering measures (AML).

In the United States, the legal implementation of KYC was established with the USA Patriot Act in 2001. This legislation requires banks to collect identification data and contact information from their current and potential clients. The goal? To combat fraud, financial crime, and the misuse of accounts, while KYC and AML support each other to neutralize dishonest activities.

How does the KYC process work in practice?

The KYC begins even before a client relationship is formalized. Financial institutions must first authenticate the declared identity of a future client by reviewing specific documents:

Driver's license or government-issued photo ID
Passport
Social Security Number
PAN card ( or equivalent )
Voter ID Card

Alongside this identity verification, proof of address is essential. Applicants can submit a utility bill for electricity, water, gas, a bank statement, a leasing or rental contract. Although there are no strictly uniform verification standards, each institution must follow the protocols of its legal framework.

KYC ongoing: beyond account opening

Authentication does not stop at account creation. Banks implement regular updates of client files, conducting periodic “recertification” through recurring KYC information requests throughout the relationship. Each client is assigned a risk level, and the financial institution monitors their transactions to ensure they align with the expected behavioral profile.

Beyond the banking sector: KYC in investment and crypto

KYC practices are not exclusive to banks. In the financial investment sector, FINRA has integrated KYC requirements into its Rule 2090, allowing investment firms to better understand their clients' needs rather than simply combating money laundering.

In the world of cryptocurrency exchange platforms, users generally open an account first and then complete the KYC process. However, unverified accounts have limited features, which encourages authentication.

The advantages and challenges of KYC

Reducing money laundering and financial fraud is the main advantage of KYC. While the process complicates and lengthens administrative procedures for banks and their clients, the benefits far outweigh the drawbacks. Moreover, the establishment of standardized norms would simplify this procedure.

In the crypto ecosystem, where digital currencies have attracted attention for their potential for illegal use, implementing KYC remains beneficial for the image and legitimacy of cryptocurrencies. Although compliance requires time and resources, it must be systematically encouraged. Nevertheless, users must ensure that companies have appropriate security standards in place before sharing sensitive information, thereby ensuring the protection of their personal data.

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