As blockchains and cryptocurrencies evolve, so do the legal frameworks and regulations surrounding it, in order for governments to better protect their citizens from crimes involving cryptocurrencies such as money laundering, terrorism financing, and scams. Two of these developments that has been made in the past decade are Anti-Money Laundering (AML) and Know Your Customer (KYC). Oftentimes, these terms are mistakenly used interchangeably to mean the same thing. As you will see below, these two terms have very different meanings.
What is the difference between AML and KYC?
This is a particularly important question because it will enable you to better understand what a company implies when it writes “AML” or “KYC” on their website.
AML is defined by Investopedia as: “AML regulations require financial institutions to monitor customers' transactions and report on suspicious financial activity.” This means that the company who is handing the payments is required to keep a record of them inside their logs. This way, if authorities detect that illegal activity is being facilitated by an account inside this company, it can send them a notice to give the transaction logs to them.
Tracking payments is not the same as simply logging the blockchain Transaction ID (TXID), because this identifier does not contain personal information needed to identify the user. This is where KYC kicks in.
According to Investopedia, KYC is defined as “a standard in the investment industry that ensures investment advisors know detailed information about their clients' risk tolerance, investment knowledge, and financial position.” It is predominately used by exchanges offering trading services so that they can determine the customer’s eligibility to use their service.
KYC is a process where the user sends their identity document or driver’s license to the company, along with their name, date of birth, and other information. The type of information that is sent is governed by FinCEN, a financial regulatory body. Many companies will also ask for the customer’s source of funds or income.
Why is KYC necessary?
KYC is necessary for some companies because they are not allowed by the government of their incorporation country to provide services to citizens of certain countries (for example, Cuba & North Korea). More often or not, certain financial services are barred from being offered to US residents, as well as a handful of other countries, so it is even more important that companies are able to filter out users from those countries.
Examples of technologies used in KYC
KYC is a rapidly advancing technology, and as such, service providers have come up with new technologies to make the process of evaluating the KYC of customers easier on the companies. These technologies include:
- Face-to-face video calls
- Biometric authentication of face using AI
- In-house risk scoring systems
KYC in OWNR Wallet
OWNR Wallet requires a KYC check that is fairly simple and quick. We do not collect biometric data or information about customer behaviors, but we do require proof of ID, proof of address and proof of funds. This data is required for security purposes only. We do not disclose it when you are making a transaction or perform other tasks using your wallet. More information about KYC verification in OWNR Wallet can be found here.
We use Sumsub* as our verification provider. Sum&Sub provides a simple, automated system where submitted documents can automatically be processed, and accepted or rejected accordingly. Sumsub is capable of detecting different cases of fraud.
- Sumsub is a tech company that helps businesses stay compliant with different regulations worldwide, steer clear of fraud, and verify clients easily with holistic KYC/AML and anti-fraud solutions.