Know Your Customer (KYC)

KYC procedures are essential for financial institutions to establish and maintain the legitimacy of their clients. By collecting and verifying personal information—such as name, address, date of birth, and identification numbers—institutions can assess the risk associated with a customer and ensure compliance with anti-money laundering (AML) regulations.

The KYC process typically involves:

• Customer Identification Program (CIP): Collecting and verifying basic information to confirm the identity of the customer.
• Customer Due Diligence (CDD): Assessing the risk a customer may pose based on their profile and transaction behavior.
• Enhanced Due Diligence (EDD): Conducting more thorough investigations for higher-risk customers to understand the source of their funds and the purpose of their transactions.

These steps help institutions understand their customers' financial activities and detect any suspicious behavior.

🏛 Example: Opening a Bank Account

When an individual applies to open a bank account, the bank will request documents such as a government-issued ID, proof of address, and possibly a Social Security number. This information is used to verify the applicant's identity and assess any potential risks associated with the new account.

📚 References

1. Investopedia – Know Your Client (KYC)
2. Okta – KYC (Know Your Customer) Definition, Guidelines & Regulations
3. IDnow – What is KYC?

⚠️ Controversies & Misconceptions

• "KYC is only for banks": While banks are primary users of KYC, other sectors like insurance companies, online casinos, and telecommunication firms also implement KYC procedures to prevent fraud and comply with regulations.
• "KYC is a one-time process": KYC is an ongoing process. Institutions are required to periodically update customer information and monitor transactions to detect and report suspicious activities.

🚀 Conclusion

KYC is a fundamental component of the financial industry's efforts to maintain integrity and prevent illegal activities. While it may seem burdensome to some customers, these procedures are crucial for the safety and security of the financial system.

Related Terms

• CEX (Centralized Exchange)

  A centralized exchange (CEX) is a cryptocurrency exchange managed by a company that holds user funds and facilitates trading through an internal order book. Examples include Binance, Coinbase, and Kraken.

• DEX (Decentralized Exchange)

  A decentralized exchange (DEX) is a platform that facilitates peer-to-peer trading of cryptocurrencies without a central authority. DEXs operate through smart contracts and decentralized liquidity pools, allowing users to trade assets without intermediaries.

• CeFi (Centralized Finance)

  CeFi (Centralized Finance) refers to cryptocurrency financial services managed by centralized entities. Unlike DeFi, where transactions occur via smart contracts, CeFi platforms require users to trust a third party for asset custody, lending, borrowing, and trading. Examples include Binance, Coinbase, and Nexo.