KYC in Banking and Cryptocurrency: A Necessary Hassle or Essential Protection?
Anndy Lian
KYC in Banking and Cryptocurrency: A Necessary Hassle or Essential Protection?
The financial world has experienced rapid changes, driven largely by technological advancements and the rise of digital currencies. Amid these shifts, the concept of “Know Your Customer” (KYC) has become increasingly important in both traditional banking and cryptocurrency sectors. While many customers view KYC procedures as tedious and intrusive, these processes are crucial for protecting financial institutions, safeguarding consumers, and maintaining the integrity of the global financial system. In this article, I’ll share my perspective on the current state of KYC practices, highlighting their importance, examining the challenges they present, and suggesting ways to improve them.
The idea behind KYC isn’t new. Banks have long been required to verify their customers’ identities and assess potential risks associated with their financial activities. These requirements stem from international regulations designed to combat financial crimes such as money laundering, terrorist financing, fraud, and tax evasion. According to the United Nations Office on Drugs and Crime (UNODC), between 2% and 5% of global GDP—roughly $800 billion to $2 trillion—is laundered each year. These alarming figures underscore the necessity of robust KYC procedures to detect and prevent illicit financial activities.
In traditional banking, KYC typically involves collecting and verifying personal identification documents, proof of address, financial history, and details about business operations. Banks also continuously monitor customer transactions to identify suspicious activities. Although these processes can be time-consuming and frustrating for customers, they are essential for banks to comply with strict regulatory requirements, such as the Bank Secrecy Act (BSA) in the United States, the European Union’s Anti-Money Laundering Directives (AMLD), and guidelines issued by the Financial Action Task Force (FATF).
The emergence of cryptocurrencies has introduced new complexities to the KYC landscape. Cryptocurrencies inherently offer a degree of anonymity and decentralization that traditional financial systems lack. This anonymity has made digital currencies attractive to criminals seeking to launder money or finance illegal activities. According to TRM Labs, in 2024, crypto transaction volume grew to over USD 10.6 trillion, up 56% since 2023. Illicit volume dropped to USD 45 billion, down 24% since 2023. In its 2025 crypto crime report released on February 10, the firm said the volume of illicit transactions dropped 24 per cent year on year to US$44.7 billion (S$60 billion) in 2024. but use in terrorist financing up. It also said that they are particular concern is cryptocurrency’s growing role for ISIS’ affiliate in Afghanistan, the Islamic State Khorasan Province (ISKP). This troubling trend has prompted regulators worldwide to impose stricter KYC and Anti-Money Laundering (AML) requirements on cryptocurrency exchanges and virtual asset service providers (VASPs).
The FATF introduced the “travel rule,” requiring VASPs to collect and share specific information about their customers’ transactions, including sender and recipient names, addresses, account numbers, transaction amounts, and transaction purposes. Although these recommendations aren’t legally binding, many jurisdictions have adopted or are currently implementing them. The travel rule aims to enhance transparency in cryptocurrency transactions, making it harder for criminals to exploit digital currencies for illicit purposes. This has to be enforced strictly in my opinion.
Despite the clear benefits of KYC in both banking and cryptocurrency sectors, several challenges remain. One significant issue is the lack of standardization in KYC processes across different jurisdictions and institutions. This inconsistency can confuse customers and create inefficiencies for financial institutions. For instance, a customer might be required to submit different sets of documents and information to multiple banks or cryptocurrency exchanges, causing unnecessary friction and frustration.
Another challenge is the rapidly evolving regulatory environment surrounding cryptocurrencies. Regulations vary significantly from country to country, and new rules are frequently introduced or amended. This dynamic landscape makes it difficult for cryptocurrency businesses to maintain compliance and implement effective KYC procedures.
Identity verification in the cryptocurrency industry also presents unique difficulties. The pseudonymous nature of many cryptocurrencies, combined with decentralized wallets and privacy-enhancing technologies, complicates the task of accurately identifying users. Traditional methods of identity verification, such as government-issued IDs and proof of address, may not always be sufficient or applicable in the digital currency context. As a result, cryptocurrency businesses must explore innovative solutions, such as biometric verification, blockchain-based identity systems, and advanced analytics tools, to enhance their KYC capabilities.
Balancing security and user experience is another critical consideration. While rigorous KYC processes are necessary to prevent financial crimes, overly burdensome procedures can negatively impact customer satisfaction and deter potential users. Based on a closed door feedback group that I have attended in South Korea, more than 80% of the group members feedbacked that they will abandon digital onboarding processes due to complexity or length. Financial institutions and cryptocurrency businesses must therefore strive to streamline their KYC processes, leveraging technology to automate verification tasks, reduce manual intervention, and provide a seamless user experience.
Proof of funds is another essential aspect of KYC, particularly in the cryptocurrency industry. Demonstrating financial capability through bank statements, letters of credit, or cryptocurrency wallet balances helps businesses assess the legitimacy of transactions and mitigate risks associated with fraud and money laundering. Verifying proof of funds in the cryptocurrency context can be challenging due to the volatility of digital assets and the difficulty of accurately assessing wallet ownership and transaction histories. Developing standardized methods and tools for verifying proof of funds in cryptocurrency transactions is crucial for enhancing transparency and trust in the industry.
From my perspective, while KYC processes may seem intrusive and burdensome, their importance cannot be overstated. Financial crimes pose significant threats to global economic stability, national security, and public trust in financial institutions. Robust KYC procedures are essential for detecting and preventing these crimes, protecting consumers, and maintaining the integrity of the financial system. There is considerable room for improvement in how KYC processes are implemented, particularly in the cryptocurrency industry.
Regulators, financial institutions, and cryptocurrency businesses must collaborate to develop standardized, clear, and consistent KYC frameworks. International cooperation and harmonization of regulations can help reduce confusion and inefficiencies, making it easier for businesses to comply and for customers to navigate onboarding processes. Additionally, investing in innovative technologies, such as blockchain-based identity verification systems, artificial intelligence, and machine learning, can significantly enhance the effectiveness and efficiency of KYC procedures.
Financial institutions and cryptocurrency businesses must also prioritize user experience when designing and implementing KYC processes. Simplifying onboarding procedures, minimizing manual interventions, and providing clear guidance and support to customers can help reduce frustration and abandonment rates. By striking the right balance between security, compliance, and user experience, businesses can build trust and credibility with their customers and regulators, ultimately driving growth and innovation in the financial sector.
In conclusion, KYC processes are a necessary hassle in today’s complex financial landscape. While they may be perceived as intrusive and cumbersome, their role in preventing financial crimes, protecting consumers, and maintaining the integrity of the global financial system is undeniable. By addressing the challenges associated with standardization, regulatory clarity, identity verification, and user experience, financial institutions and cryptocurrency businesses can enhance the effectiveness of their KYC procedures, fostering greater transparency, trust, and security in the financial industry. As we continue to navigate the evolving landscape of digital finance, embracing robust and efficient KYC practices will be essential for safeguarding our financial future.
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