Know your Customer (KYC): Why the verification process contributes to security in the crypto world
When the Bitcoin concept was developed over 10 years ago, the first cryptocurrency was created as a reaction to the financial crisis of 2007 to 2009 - a counter-movement to the traditional financial scene, in which people had lost confidence. For the first few years, Bitcoin and the cryptocurrencies that followed moved under the political radar. Cryptocurrencies could be bought and sold without any proof of ownership. With the rise of various crypto exchanges and the resulting adaptation for the masses, politics became increasingly concerned with cryptocurrencies and other digital payment options. One consequence of these political regulations is the KYC process. Read on to find out what the term means and why such regulations make sense for customers.
The registration process at BSDEX and many other crypto trading venues
Registering with the Börse Stuttgart Digital Exchange is very simple. All you need is your name, an email address and a password. You can then view the BSDEX trading platform and log in to the app. However, trading cryptocurrencies such as Bitcoin or Ethereum is not possible immediately. Verification is required first. BSDEX - and all other crypto trading venues based in Europe - need to know who is trading on their platform. Entering additional information and quick verification via VideoIdent ensures that customers really are who they claim to be. In the VideoIdent process, the identity card or passport is used for this. Trained employees use various features to recognize the authenticity of an ID card and confirm the identity of new customers - a standard procedure that has been used by banks for many years. Know your Customer, or KYC for short, is the name given to this verification process. A few years ago, you had to go to the post office for this, but nowadays verification is simply done via smartphone. Without identifying yourself, you would not be able to open a bank account, crypto account or custody account.
Source: https://www.idnow.io/regulation/what-is-kyc/
Why does the KYC procedure exist in the financial and crypto sector?
Companies are subject to due diligence obligations. The resulting transparency of the persons involved contributes to the security of the financial system. If banks and crypto trading platforms were to allow accounts to be opened with fictitious identities, it would be much more difficult to take action against cybercrime and financial crime.
Welche Vorteile das KYC-Verfahren für Unternehmen bietet
What advantages the KYC procedure offers companies
Companies are offered more security when trading in the crypto environment
All companies involved in crypto trading on the Börse Stuttgart Digital Exchange are licensed for their business areas and are monitored by the German Federal Financial Supervisory Authority (BaFin). This offers you as an investor the certainty that the currencies used, traded and held in custody meet the highest possible regulatory standards.
Reputational damage caused by criminal customers is avoided
Criminals who use a company's services to engage in illegal activities damage the company's reputation and thus its economic situation. As many blockchains are very well suited to making anonymous transfers, registering on German crypto exchanges without prior verification could lead to increased use of cryptocurrency by criminals. The crypto exchanges would not even be able to check this without a verification process. The "Suisse Secrets" reports published by the Süddeutsche Zeitung in early 2022 show the consequences that a lack of regulation can have on a company's reputation.
Lots of news about crime is damaging the industry
Reputational damage is not limited to individuals. If the media regularly report negatively on certain sectors, this can have a long-term negative effect. The trust of customers and investors falls. In the worst case scenario, this could mean the economic end of the crypto industry in Germany. The KYC procedure makes it difficult for criminals to launder money undetected on German crypto exchanges or to promote terrorism. This protects the reputation of cryptocurrencies and crypto trading venues.
More trust towards customers
Would you lend 10 euros to a stranger on the street? Would you lend your best friend 1,000 euros? Although the value is 100 times higher, you would certainly be more likely to lend your best friend 1,000 euros. Since you know him, know where he lives and are sure that you will get your money back, you give him the money. With a stranger, it is very likely that you will never see your money again. It is similar with customers and companies. If you have a credit card and always pay off your monthly debts over several years, trust in you increases. You get a higher credit limit every year. The same applies to a crypto trading venue. For example, higher transfer limits can be set up. Thanks to KYC, companies know their customers and can offer them more and better features.
What advantages the KYC process has for customers in the crypto industry
Regulation helps to establish Bitcoin and co. in the long term
The more companies recognize the benefits of cryptocurrency and the more secure the regulatory framework is, the more likely it is that cryptocurrencies and blockchains will be used to interact with customers. Be it for payment, to verify ownership/shares or as a reward for active customers. If the opportunities to use Bitcoin and the like in everyday life increase, there is a greater chance that cryptocurrencies will be used by the masses and become established in the long term. The KYC procedure is part of the regulatory framework for this.
Identity theft is prevented
Identity theft on the Internet is not uncommon. For example, anyone can order parcels on the Internet in your name and send them to your address. What would be the consequences if criminals opened an account at a bank in your name and carried out transactions? You could face high financial losses or criminal charges. The same applies to crypto brokers and crypto trading venues. The KYC procedure makes it more difficult to steal other people's identities and carry out financial activities in their name.
Protection against phishing and other cases of cybercrime
Another case of cybercrime is phishing. In phishing, criminals try to obtain your access data. In September 2022, for example, criminals obtained all of Uber's customer data by posing as IT employees and obtaining access data from employees.Anyone who has implemented additional security measures (e.g. multi-factor authentication) and reacts quickly can change their access data or have their access blocked. This is possible, among other things, because the account is assigned to a verified user. The bank or crypto company can identify you as the owner through various verification features and restore access. Imagine if anyone could open a bank or crypto account without verification. Once someone gains access to your unverified account, you would have no way to regain access.
Enhanced protection when changing personal data
To avoid identity theft and phishing, BSDEX plays it safe. If, for example, an attempt is made to change the telephone number after verification, this new telephone number must be verified again. This prevents criminals who have access to your access data from simply changing data such as address and telephone number and making transactions.