What is KYC/AML?

What is KYC/AML?

You might have heard of the terms KYC and AML but what exactly do they stand for?

KYC, short for Know Your Customer, is a due diligence practice that is followed by many entities across different industries to obtain relevant information about customers. AML refers to Anti-Money Laundering and is another process to prevent organizations from individuals using their services for money laundering as well as to prevent such companies receiving money from illicit and illegal transactions.

These processes help organizations to know and understand the people they are dealing with and to filter out suspicious individuals. Customers are usually required to provide appropriate identification documents such as an identity card/passport, residential address, photo ID, and utility bills. In order to pass the verification, they will be required to take a picture of themselves holding their appropriate identification documents by showing a clear picture of their face to prove its genuineness.

Why is it necessary?

The main purpose of these steps is to help the organizations identify their customers, as well as to prevent unqualified or unauthorized individuals from using the service, such as minors, undocumented immigrants, and people with criminal records. By conducting these processes, the entities can easily determine if customers are involved in criminal acts. The most important part of the process is to ensure transparency of any transactions.

KYC was first introduced in the United States in late 1990s but the regulations quickly tightened up and became stricter after the 9/11 terrorism incident in 2001. During this time, the US Secretary of the Treasury was urged to finalize all regulations about KYC before October 26, 2002, with compliance mandatory for all banks in the country.

Elsewhere, KYC was introduced in India by The Reserve Bank of India back in 2002. It then issued a directive to all banks in India to be fully compliant with the guidelines set out before December 31, 2005.


While this process seems to contradict with the blockchain principle of anonymity, KYC/AML is still important to ensure that all the transactions within the system are genuine and are not part of any illegal activities.

The KYC and AML process is common for financial institutions, but some other industries have already begun to implement the policies. South Korea, the United States, the United Kingdom, and the European Union have also made KYC/AML rules an integral part of all cryptocurrency regulatory frameworks. By implementing KYC/AML, companies will abide with government regulations which will help them gain trust and support from the regulators. This could potentially lead to more a more positive outlook on cryptocurrency among governments, which could serve as a precursor to eventual legalization and regulation worldwide.

Cover image from ftfnews.com

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