Cryptocurrencies are pretty secure and safe by their nature. However, online crypto exchanges had their fair share of security breaches, with one of the most popular examples being the cyberattack on Mt. Gox. The Japanese exchange couldn’t deal with a devastating blow imposed by attackers that it had to shut down shortly after that.
Luckily, that was a thing that had to happen sooner or later. That’s why many crypto exchanges pay a lot of attention to various security measures that make funds and users protected from any kind of malicious behavior.
Two of the most popular policies among online cryptocurrencies are the AML and KYC policies. These are often very closely connected to each other and have the same goal — to make the exchange a safe place to buy bitcoin and trade.
What is AML?
The abbreviation AML stands for anti-money laundering. Simply put, cryptocurrencies paved some new ways to launder money, given their somewhat unregulated status. That’s why crypto exchanges need to have a good AML policy that would prevent any possible procedure-related to money laundering. As such, AML is part of KYC and vice-versa.
Let’s take a look at what KYC actually is.
What is KYC?
KYC stands for Know Your Customer. The whole idea is that businesses should somehow recognize the identities of their clients in order to make a sustainable and trustworthy relationship with them. Most importantly, businesses need to be able to determine any illegal intentions that clients might have by following the KYC procedures.
In other words, by knowing their customers, online exchanges could increase security levels and protect both themselves and other users from potential threats.
Identity verification plays an important role
One of the most important things cryptocurrencies need to do is to verify the accounts of their customers. This is also known as CDD or customer due diligence. As a user, this is something that you probably did several times before. We register on various sites representing businesses and are required to submit some info so that they get to know us.
In the case of CEX.IO, the company usually asks for a document that confirms the identity of a user. In many online cryptocurrency exchanges, this step is not obligatory. In other words, users are still allowed to register without actually verifying their identity. Nevertheless, they still have to provide some basic info such as their country, email, and more.
Most of the time, however, users who opt not to verify their identity have very limited access to the exchange, if any. This is actually a way to fight money laundering. By not allowing unverified users to trade big amounts of money, cryptos protect any kind of illegal activity or at least minimize it.
Of course, all cryptocurrency exchanges have extensive privacy policies and other regulations, meaning they have to keep all the information about their users stored and protected. In other words, whenever you disclose information about you in order to verify your account, you can rest assured it will remain safe — if you register on a trusted site, that is. Therefore, it’s best to stick to the most popular crypto exchanges to ensure maximum protection.
Card verification procedure
Apart from verifying their identities, many users have to verify their payment methods. If they use cards in order to deposit and withdraw money, they have to follow instructions for verifying their cards.
Some exchanges might even ask you to verify that you are currently the one using your card by asking you to take a picture with the card and send it. This practice might seem odd to some new users, but it’s actually not that uncommon in the crypto world. After all, it’s the safest way to prove you’re the real owner of a card.
Just like with identity verification, card verification is not obligatory in all online crypto exchanges, but most of them will definitely give you more options once you complete the procedure.
Compliance officer — a person in charge
A compliance officer is one of the crypto exchange employees who makes sure that all procedures regarding AML/KYC policies are in effect. They often supervise those processes and report on anything they encounter. Ultimately, their job is to ensure that these procedures are upgraded by making reports and making sure everything is up-to-date.
It doesn’t end with verifications
Knowing customers and preventing illegal operations doesn’t stop with exchanges verifying their users. As a matter of fact, it’s a continuous process that includes monitoring transactions and deducting transactional patterns.
Compliance officers and other personnel need to have an insight into transactions of their users and reserve the right report transactions of suspicious nature. Finally, every exchange monitors IPs that are blacklisted and updates them along the way.
Many exchanges, including CEX.IO, have risk assessments, which further help with fighting operations such as money laundering or financing of terrorism. By assessing and identifying the possible risks, exchanges make sure to take steps in the right direction and further improve safety and security.
Conclusion: It’s just a start
Some of the things mentioned in this article are just some of the most important operations conducted in order to maximize safety and security on online exchange platforms. Each exchange has a slightly different approach. What matters is that the most popular ones perfected their KYC and AML policies and adhere to them in order to provide their users with the best possible experience.
As an expert on Bitcoin-related topics, I've found myself as a Journalist at cex.io - cryptocurrency exchange. I'm working on articles related to blockchain security, bitcoin purchase guides or bitcoin regulations in different countries.