Although, people can buy top cryptocurrencies such as bitcoin (BTC) and Ether (ETH) from the over-the-counter (OTC) market, individuals still require an exchange as a way to obtain different altcoins. Exchanges are an essential part of the system that makes the crypto market tick. Regulators across the globe have identified the same and that is the reason why regulatory moves are primarily targeted towards exchanges. Regulators need to be certain that exchanges employ the very best security methods in addition to measures — Know Your Customer (KYC),” Anti-Money Laundering (AML), and Combating the Financing of Terrorism (CFT), for instance — which discourage illegal transactions and improve account/wallet security.
The incident of Binance hack on May 7, in which around 7,074 bitcoins (worth $40 million on the day) were stolen, Changpeng Zhao Company’s founder and CEO, announced that
“We are making significant changes to the API, 2FA, and withdrawal validation areas, which was an area exploited by hackers during this incident. We are improving our risk management, user behavior analysis, and KYC procedures.”
The above statement is clearly a sign that KYC, AML and CFT Regulations are for the betterment of exchanges and people using it.
So, let’s see how regulations like KYC, AML and CFT Regulations, affect the exchanges and why complying with them is essential for white label crypto exchange software.
What exactly are KYC, AML and CFT?
Every country has its own set of rules and regulations that are governed by its laws. KYC, AML and CFT on the other hand do not come with specific standards because the regulators expect financial institutions to do everything they can to minimize the risk.
Let’s get a clear insight on KYC, AML and CFT individually:
Know Your Customer
Know-your-customer refers to a set of processes and procedures that a firm applies to ensure the identity of its customer or user. The robustness of all KYC procedures changes across different businesses and jurisdictions. But, KYC basically includes the collection and confirmation of a user’s way of identification including government-issued identity cards, phone numbers, a physical address, a contact address and also a utility bills, to list a few.
Anti-Money laundering consists of a set of procedures, laws and regulations that are created to put a stop on income generation through illegal activities. Some of those activities include tax evasion, market manipulation, public fund misappropriation, trade of illicit goods and other activities of such kind. Financial institutions have to continuously conduct due-diligence processes to detect and prevent the malicious activities. Crypto industry is being viewed as a high-tech era of virtual money laundering. The cryptocurrency gambling sites are reported to be the most common tools for money laundering. AML laws play a significant role in allaying chances of money laundering.
Combating the Financing of Terrorism (CFT)
Combating the Financing of Terrorism is a set of procedures aimed at exploring, dissecting, discouraging and blocking sources of financing meant for activities that comprehend spiritual, ideological or political goals by violence, or its threat, against civilians. These procedures present law enforcement services using another and potentially efficient method to track and block terrorist routines.
Exchanges that abide by all the rules and regulations based on their geographical locations have fortunately reduced the chances of their exchanges getting hacked over the times. It is time that every exchange realizes that KYC, AML and CFT compliance is necessary and helps exchanges in gaining trust of their users.