KYC, AML, and CDD explained

KYC, AML, CDD, blockchain, crypto assets, and virtual currencies – the complex terminology is one of the crypto world features and an entry barrier.

December 8, 2022 · 2 min read

Crypto terminology education

KYC, AML, CDD, blockchain, crypto assets, and virtual currencies – the complex terminology is one of the crypto world features and an entry barrier. The confusing shortcuts are linked to multiple processes at different platforms and challenging setups. Not to mention the time one must have to complete all of it.

At TiltUp, we are fully aware of the challenges. Our product is an easy-to-implement and simple-to-use, with safe and reliable API. It is fully compliant with MiCA. The mission was to provide our customers with an easy way into crypto. We also pride ourselves on educating our users on the necessary crypto terminology and processes and implementing the nitty-gritty tech stuff for them. Let’s get to basics and explain a few confusing crypto terms.

What is KYC?

 KYC (Know Your Customer) is the most basic financial institution process used to identify, verify and assess the transactional risk connected with a potential customer. The KYC scope may look different. It depends on the crypto service provider’s requirements and the country’s jurisdiction.

The Financial Action Task Force (FATF) underlines that the crypto provider must perform individual risk assessments, collect and verify information about their customers and build risk profiles to help with future compliance decisions. 

KYC is part of AML (Anti-Money Laundering) and CFT (Counter Financing of Terrorism) compliance.

The first step in a KYC crypto process is potential customer identification which requires personal information such as full name, address, and date of birth. The most common identifying documents required during KYC will include

  • Passport
  • Government-issued photo ID
  • Driving license
  • Voter ID Card
  • Resident permit
  • Utility bill

It can also require digital facial verification or biometric identification.

Once that part is completed crypto service provider starts their check using the identity verification service to ensure the legitimacy of provided data. The procedure helps to protect the service provider from money laundering and fraud.

What is AML?

KYC is the first stage of AML (Anti Money Laundering), a much broader term covering regulations, policies, and guidelines created to prevent illegal moneymaking and the movement of such funds.

Crypto AML aims to stop digital criminals from performing transactions, i.e., converting illegally obtained cryptocurrencies into fiat currencies.

The AML standards were set by The Financial Action Task Force (FATF) back in 2014. FinCEN, the European Commission, and other regulatory bodies turned the FATF cryptocurrency AML recommendations into laws.

In light of $2.3 billion in funds laundered through cryptocurrency exchanges in 2019, the need for AML becomes clear.

What is crypto CDD?

CDD (Customer Due Diligence) refers to the risk assessment process of a potential customer.

Whilst KYC aims to identify the potential customer, CDD assesses and classifies them according to the risks involved. Challenging cases require more thorough checks under EDD (Enhanced Due Diligence).

KYC, AML, CDD – cons & pros

The described processes protect crypto service providers from being used for money laundering and other criminal activities. Non-compliance could result in high fines, loss of funds, and a damaged reputation.

The opponents argue that compliance clashes with the privacy and decentralization ideas, by placing sensitive, personal data in the central database.

The advocates highlight that crypto adoption grows, therefore, regulations tighten up, and the above processes become unquestionable. Whether it is possible to provide a regulatory-compliant solution that ensures users’ privacy stays questionable.