Web3 presents a new domain for potential acts of fraud and money laundering, so governments have been keen to enforce the need for KYC requirements across the board. As it’s a mandatory part of many Web3 business operations now, consider this your guide to navigating the world of KYC.
What is Know Your Customer (KYC)?
Know Your Customer or ‘Know Your Client,’ as it’s sometimes referred to, is the protocol of verifying the identity of a customer as well as their financial profile. The process itself involves:
- Establishing the identity of a customer;
- Understanding the purpose and nature of the customer’s activities;
- Checking money laundering risks that may be associated with the customer’s financial profile;
- Qualifying the source of the money coming in as legitimate.
For non-individual customers, the process will involve authenticating the whereabouts and owners of the organisation, as well as its legal status.
In most cases, you’ll find that customers pass with flying colours. It’s a bit of a hindrance to the onboarding process, but it’s become a necessary one for financial transactions in the digital world.
Why is KYC important?
The importance of KYC goes far beyond simply ticking a box for the regulators – even though, there is a lot of that going around for Web3 businesses globally right now. Instead, Know Your Customer protocols are actually very handy for projects to ensure their own financial safety as well.
Above all else, the aim is for you to protect your Web3 project from unknowingly facilitating financial crime or working with otherwise untrustworthy actors. As a little additional bonus, running a stringent KYC process gives your business the shine of being a very trustworthy organisation.
KYC’s role in AML
As a subset of anti-money laundering (AML), Know Your Customer plays a key role in identifying people who launder money. It plays into both AML regulations and attempts to combat the financing of terrorism. With all businesses deploying KYC procedures, regulators and legal authorities can more easily retrace bad actors. Importantly for your business, as part of the KYC process, you’ll receive a notification if you check on anyone whose information aligns with the lists of suspects kept by governments and law enforcement.
KYC’s role in stopping fraud
The KYC process minimises the potential for someone to use another person’s identity and finances fraudulently. Checks to identity via a bank, which will require photo identification and other such ID materials, or with biometrics tools, make the prevention of fraud much more accessible online.
Ensuring that you don’t get sued with KYC
If you implement a stringent KYC process that adheres to local AML and CTF (counter-terrorist financing) laws, your organisation will gain protection against losses that result from the finding of illegal transactions and funds from your customers. Otherwise, your organisation could be seen as assisting criminal behaviour and potentially involved in financial misconduct. KYC is as much about protecting your back as it is hindering criminals.
When Web3 businesses slip up with a lack of KYC protocols
In late 2023, decentralised cryptocurrency tumbler Tornado Cash drew the ire of the US government for its lacking KYC procedures. An indictment from US federal prosecutors states that Tornado Cash and its founders didn’t establish effective AML or KYC protocols, as required by money services businesses or the Financial Crimes Enforcement Network – entities that the company also failed to register with. In the end, a hacker was found to have laundered a large sum of money, developer Alexey Pertsev was sentenced to over five years in prison, and the platform was blocked from the US market.
Top 10 KYC tools for Web3 projects
To be considered a strong KYC tool for a Web3 project, it needs to tick four boxes in its entirety to ensure compliance with the more stringent regulations. These four elements are:
- Utilising Customer Identification Program (CID);
- Assessing the identifications through Customer Due Diligence (CDD) procedures;
- Performing Enhanced Due Diligence (EDD) for extra protection;
- Ongoing monitoring to keep information current and report any potential red flags.
Identity.com
A very popular solution for Web3 projects, the open-source Identity.com upholds privacy by not trading any personal information that it acquires and has been specifically crafted to enable identity verification on a decentralised network.
Ondato
Combining AI and biometric authentification, Ondato is a KYC platform that any business should consider. Its extensive suite allows you to have full vision and control over your KYC and AML risk management.
Fractal ID
Specialising in Web3 users and chains, Fractal ID is all about letting users partake in the necessary KYC and AML procedures while upholding their privacy. The decentralised identity solutions meet your legal requirements and appeal to users wanting to rely on trustless systems.
SolidProof
The KYC procedure run by SolidProof gives you a lot of options while also being comprehensive on a base level. Users need to verify themselves through video, documentation, and address. After this, you can get sent a report that assesses any risk and suggests ways that you can mediate these risks.
iDenfy
iDenfy specialises in business identification. It draws from official credit bureaus in over 160 countries and registry reports from governments, giving its users a tremendous amount of coverage when running KYC procedures.
ComplyAdvantage
ComplyAdvantage is all about offering you customisable tools to streamline your specific AML, CTF, and KYC needs. It’s available in over 200 territories and is proven to be compliant with financial crime regulations around the world.
Chainanalysis
For crypto and NFT projects, many turn to Chainanalysis. The brand is well-known for its advanced crypto security services and even offers its own certification course to help you apply your own compliance measures.
Trulioo
Through one API, Trulioo gives you access to all of the KYC tools that you could need while drawing from identity networks from across the globe.
Elliptic
Enhanced due diligence, transaction monitoring, wallet screening, and AML risk assessments are all part of the package of the ever-up-to-date platform Elliptic.
Refinitiv
Refinitiv is very much your complete suite of KYC tools that’ll help you to abide by AML regulations from the on-boarding process and thereafter. Best of all, the KYC process is automated!
> Do I need to KYC when I simply want to own governance tokens in a protocol? How does KYC work in a decentralized Foundation if I am Lead? These are just a sample of question we get all the time at Otonomos and which we’d be happy to answer for you. Schedule a call today if you have any questions about your project stack and related KYC.
