AML, KYC, and KYT in Cryptocurrency Exchanges: What They Are and Why They Matter | Edenex

What Do AML, KYC, and KYT Mean, and Why Does the Crypto Market Need Them

When dealing with cryptocurrencies, you will inevitably encounter terms like AML (Anti-Money Laundering), KYC (Know Your Customer), and KYT (Know Your Transaction). These measures are essential for crypto platforms to protect all transaction participants and avoid pressure from regulators. Let’s explore why exchanges might ask for a photo of your passport, why some transactions are marked as completed but the funds are not yet credited, and why all of this is necessary.

AML, KYC, and KYT are crucial components in the operation of cryptocurrency exchanges. They ensure legal compliance, protect users, and uphold the reputation of the platforms. Although implementing these procedures requires significant resources, they ultimately enhance the security and stability of the entire cryptocurrency ecosystem.

AML. Anti-Money Laundering

AML, or Anti-Money Laundering, includes legislative, regulatory, and operational measures to prevent the use of financial systems for laundering illegally obtained funds. Money laundering involves the legalization of proceeds from criminal activities through circulation within various financial instruments and institutions.

Why is AML important for cryptocurrency exchanges?

- Regulatory Compliance. Implementing AML procedures helps exchanges comply with international and local laws and regulatory requirements. Failure to meet these requirements can lead to fines and other legal consequences.

- Reputation and Trust. Exchanges that adhere to AML procedures gain more trust from users and partners. This trust is crucial for attracting investors and expanding the customer base.

- Security and Stability. Implementing AML safeguards the platform from being used in illegal operations, reducing risks and contributing to the platform's stability.

KYC. Know Your Customer

KYC, or "Know Your Customer," checks a client's identity. This typically involves collecting and verifying personal data, such as name, address, date of birth, and contact information.

Why is KYC necessary?

- Fraud Prevention. Identifying users helps exchanges prevent fraud and protect honest users from illicit activities.

- Legal Compliance. KYC is a mandatory requirement in many jurisdictions. Complying with these requirements allows exchanges to operate legally and avoid fines.

- User Protection. KYC ensures the safety of all parties by providing an additional layer of protection against identity theft and other cybercrimes.

KYT. Know Your Transaction

KYT, or "Know Your Transaction," focuses on monitoring and analyzing transactions to detect suspicious activity and prevent illegal operations. Unlike KYC, which is aimed at identity verification, KYT analyzes user behavior and the characteristics of their transactions.

The Importance of KYT for Cryptocurrency Exchanges

- Detection of Suspicious Activity. KYT helps identify unusual and suspicious transactions that may indicate money laundering, terrorism financing, or other illegal activities.

- Regulatory Compliance. Many regulators require financial institutions to monitor transactions to detect and prevent illegal operations. KYT helps exchanges meet these requirements.

- Risk Management. Transaction analysis enables exchanges to better understand the risks associated with clients and their activities and take measures to minimize them.

How AML, KYC, and KYT Work in Crypto

Implementing KYC

1. User Registration. During the new user registration, the exchange requires personal data submission, such as name, address, date of birth, and contact details.

2. Document Verification. Users upload scans or photos of documents that confirm their identity and residential address. The exchange verifies the authenticity of these documents either through automated systems or manually.

3. Identity Verification. Users may be asked to participate in a video call or take a selfie with their document. This helps ensure that the submitted documents belong to a real person.

Why Exchanges May Request a Passport Photo?

- Fraud Prevention. Document verification ensures the authenticity of a user's identity, preventing the creation of fake accounts.

- KYC Compliance. The passport is one of the primary documents for ID verification.

- User Protection. A passport photo helps protect the user’s account from unauthorized access and identity theft.

Implementing KYT

1. Transaction Monitoring. All transactions on the platform are analyzed in real-time using algorithms and tools to detect suspicious activity. Machine learning and artificial intelligence play a key role in identifying abnormal patterns.

2. Behavior Analysis. KYT systems analyze user behavior, such as transaction frequency and volume, geographic data, and other parameters. For example, the unexpected boom in trading volume of one user who previously made small transactions could raise suspicions.

3. Response to Suspicious Transactions. When suspicious activity is detected, transactions may be paused for further investigation. The exchange may request additional information from the user or block their account until the verification is completed.

Why Some Transactions Are Marked as Completed, But Funds Aren’t Immediately Credited?

- Security Checks. Transactions may be delayed for additional security checks to detect suspicious activity.

- Source of Funds Verification. Exchanges may verify the source of incoming funds to prevent money laundering.

- Regulatory Requirements. Completing transactions may take time due to the need to comply with all regulatory requirements and internal checks.

Implementing AML

1. Policy Development. Exchanges develop and implement AML policies including KYC and KYT procedures, and other measures to prevent money laundering. The policy must comply with international standards and local requirements.

2. Employee Training. Exchange staff undergoes AML training to prevent illegal operations. Regular training and certification help maintain high standards.

3. Reporting. Exchanges are required to report suspicious transactions to the appropriate authorities, such as financial intelligence units or law enforcement agencies. Regular reporting and cooperation with regulators are key components of AML programs.

For users, adherence to these measures means an added layer of protection and confidence that their funds and personal data are secure. It’s important to understand that the verification and monitoring process can take time, but it’s a necessary step in creating a safe and reliable financial environment.

AML, KYC, and KYT are not just formalities but essential elements that ensure the security and transparency of cryptocurrency exchanges, contributing to the development and legitimacy of the cryptocurrency industry. In the constantly evolving landscape of digital assets and tightening regulatory requirements, these measures form the foundation for sustainable market growth.