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KYC and AML for cryptocurrency transactions

Know-Your-Customer (KYC) identity verification procedures have become vital to ensure that Anti-Money Laundering (AML) and Combating-Financing-of-Terrorism (CFT) efforts to curb cryptocurrencies-associated crimes are successful.


This aspect is of paramount importance for crypto investors engaged in P2P transactions and those who engage in USDT INR Arbitrage. Reserve Bank of India issues regulatory guidelines on Know Your Customer (KYC) norms / Anti Money Laundering (AML) Standards / Combating of Financing of Terrorism (CFT) from time to time. See this Master Circular that consolidates all the guidelines issued by Reserve Bank of India on KYC/AML/CFT norms.


While cryptocurrency means cheaper, faster international transactions, it also makes the crypto sector ripe for criminal activity, such as money laundering and terrorist funding. All transactions are logged into the blockchain, but these are typically made under pseudonyms or usernames that are difficult to link to actual identities.

World governments have already taken several steps to curb money laundering by requiring cryptocurrency exchanges to bring their KYC processes in line with those of other FIs. The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, announced in November 2019 that it would begin strictly enforcing the “travel rule” for cryptocurrency exchanges.

Governments and regulators continue to work on anti-money laundering and publish new regulations. The Fifth Anti-Money Laundering Directive (AMLD5) in Europe and FinCEN’s Final Rule in the USA make it clear that virtual currencies and the exchanges on which they trade are subject to anti-money laundering legislation.

This means a solid AML program that helps identify and protect against suspicious activity needs to be in place to protect against financial crime and money laundering.

What is AML?

AML, or Anti-Money Laundering, is a set of regulations and laws designed to prevent certain illicit practices. In many cases, parties who seek funding for illegal or terror-related causes may run acquired funds through several steps to make it seem like their resources were obtained legally. For instance, money earned from selling illegal substances could be “laundered” through various steps to make it appear as if it came from a legitimate source.

AML regulations require companies to submit risk reports, perform diligence processes before accepting new customers and report suspicious activities. Regulated entities that fail to comply with AML regulations face severe penalties and possible criminal prosecution.

Led by AML watchdogs like the Financial Action Task Force (FATF), countries develop their measures to combat domestic money laundering, and policies can differ greatly from country to country. According to the FATF guideline, Virtual Asset Service Providers must apply a risk-based approach and risk-assessment like other financial institutions. Countries that are members of the FATF are responsible for the implementation of these measures.

As with all money service businesses, cryptocurrency exchanges and custodian services must register with FinCEN. AML programs need to stipulate what KYC information will be collected, as well as appoint a compliance officer to monitor and oversee transactions. To stay compliant, AML programs must be able to identify and report suspicious activity and file Currency Transaction Reports (CTR) for transactions above $10,000.

One concern with cryptocurrencies such as Bitcoin and Ether is that, since the accounts aren’t conventional, transactions with them may be denied as they strive to comply with AML laws. This means careful planning is necessary to prevent lost access to funds.

What is KYC?

Know Your Customer (KYC) policies are used to support AML laws. The key principle of KYC is to make sure the bank or financial entity avoids being used by other parties for money laundering, and it does

this by gaining certain information from potential clients and customers. Due diligence effort is necessary to make sure one avoids doing business with criminal or terrorist elements as well as to maintain compliance with federal and state laws.

The purpose of Know Your Customer procedures is for the business to recognize the person who will become the customer. If we talk about how this happens in general, the business collects customer data during customer account opening and checks the accuracy of this data. In this process, the accuracy of the data is as important as collecting the data. Because, If the data is not correct, all checks to be performed under the AML compliance program will lose their functionality. Today, there is various software like Sanction Scanner that helps verify this data.

Some data collected are (These data may vary from region to region): Customer’s full name, Customer’s date of birth, proof of customer address, Customer ID, in some cases, users may need to take a selfie for the biometric facial recognition system.

Now, as crypto exchanges and wallets become more like financial institutions, KYC needs to be added to the cryptocurrency AML programs for these entities. By implementing KYC procedures, exchanges can demonstrate trustworthiness to new users.

Difference between AML and KYC

The confusion between what constitutes AML and KYC is a minefield for financial institutions, often resulting in fines and penalties. Companies have to ensure they incorporate a comprehensive AML program, not only KYC.

Anti-Money Laundering (AML) is a complex framework of strategies, rules, and regulations to combat money laundering, while Know-Your-Customer (KYC) is a process that only identifies and authenticates the customers of financial institutions based on their perceived risk profile.