Know Your Customer or also known as
KYC is a standard due diligence process. It is used by investment companies in order to figure out their customers who are doing business with them. Besides being a regulatory and legal requirement, Know Your Customer is also a good business practice in order to know better the goals and suitability of investment. It is also beneficial in reducing the risk of suspicious activities. So, in short, Know Your Customer is the process of identifying who your investors are, verifying the sources of your clients’ funds whether they are legitimate or not, and also requiring anti money laundering information in details from your clients.
If you get information in details about your customers, you will be able to protect both parties in a business relationship and transaction. Know Your Customer has an important goal to provide superior service, prevent liability, and also avoid any association and relation with money laundry and other illegal money frauds.
What's the Point of KYC?
The use of KYC in the world of Crypto Assets is not much different from the purpose of KYC in banking. If the banking aims to get to know the customers well, the bank can monitor each customer's transactions and report suspicious transactions.
Thus, in the world of Crypto Asset KYC also aims to provide security for users and the market itself, also oversees Crypto Asset transactions, minimizing fake accounts that can lead to cyber crime, and avoiding the possibility of money laundering.
What's the Difference Between KYC & AML?
The AML concept is far broader than KYC. AML stands for
Anti-Money Laundering and refers to a series of policies, laws and regulations to combat money laundering.
| KYC | | AML |
|---|
| Verification of Customers by gathering personal information and verify it | PROCESS | Legal controls over the suspicious activities and transaction |
| To prevent bad actors from entering into the business platforms | PURPOSE | To avoid terrorist financing across the globe |
| Identity validation, risk identification, and management | ELEMENTS | Risk assessment, detection, prevention and reporting of suspicious transactions |
| Should be smart, efficient, and throughly done | FEATURES | Should be holistic, coherent and well-thought-out |
However, KYC and AML are connected. For example, if a
Digital Exchange has specified the KYC procedure, it indicates that the startup is legitimate. If a project follows AML and KYC regulations, it has greater potential to start a successful collaboration with the banking sector. Why do they want to do that? Many digital exchanges struggle to get bank accounts to simplify global financial operations. The bank, in turn, struggles to trust digital exchange in terms of AML. This is where KYC and transparency play a very important role.
Why is Know Your Customer Important?
Know Your Customer is a global business practice in the regulation era within the investment industry. It is a requirement from industry regulations the purpose of protecting all of the stakeholders in the industry. It is also for the sake of the best business interest of investors or investment companies, especially if a lot of money are at stake. If a business or issuer obeys the
Know Your Customer policies, they will be able to decrease the financial risks of their business arrangements with certain clients. The aspects of Know Your Customer requirements are knowing where your clients get their income, measuring their capability of investing in your market, and get their complete financial portfolio as well as their backgrounds.
All of those checks are also able to be an important risk management strategy in order to avoid getting involved with clients who potentially have participated in illegal activities. As you can see, Know Your Customer is very essential and crucial. The importance of Know Your Customer can be even clearly seen from the investors’ point of view. Even though these strict checks might be a burdensome process for the investors, they surely want to create a protected and trusted environment to allow investment or financial activities with the company. Moreover, the clients will be able to know that they are working with a legal company and feel educated to understand whether they are ready to invest in the company’s market or not.
The key to success in a business relationship is building trust among parties. Know Your Customer can be a complicated, manual, and inefficient process.
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