Does crypto wallet need KYC?

You may have heard of “Know Your Customer” or KYC requirements when it comes to financial institutions. But what about crypto wallets? Does crypto wallet need KYC? The short answer is: it depends.

There are two types of crypto wallets – custodial and non-custodial. Custodial wallets are those that are held by a third party, such as an exchange. Non-custodial wallets are those that are held only by the user.

Custodial wallets are subject to KYC requirements because the third party holds onto the user’s crypto. This means that the third party can be held liable for any illegal activity that occurs with the crypto.

Non-custodial wallets are not subject to KYC requirements because the user is the only one who has access to the crypto. This means that the user is solely responsible for any illegal activity that occurs with the crypto.

So, if you’re using a custodial wallet, you will need to go through a KYC process. But if you’re using a non-custodial wallet, you will not need to go through a KYC process.

KYC/AML for crypto exchanges

Does crypto wallet need KYC or AML? For cryptocurrency exchanges, AML programs are a must, both for protection against financial crime and to stay compliant with heightening regulations.

This means the implementation of an effective AML program that includes a Customer Acceptance Policy (CAP), a Customer Identification Program (CIP), ongoing monitoring of transactions, and risk management procedures.

CAP refers to the identification process of new customers using official documentation. CIP is the process of verifying a customer from this documentation and against official databases.

So, if you’re looking to use a crypto exchange, you will need to go through a KYC/AML process.

In the EU, legislation differs for fiat-to-crypto exchanges and crypto-to-crypto exchanges. Any cryptocurrency service that enables a customer to exchange from fiat currency to crypto needs to implement KYC. Exchanges that strictly deal with crypto do not.

A solid AML program that helps identify and protect against suspicious activity needs to be in place to protect against financial crime and money laundering.

For now, crypto exchanges are not up to scratch with their AML policies. A recent study showed that 69% of the 216 crypto exchanges do not have complete and transparent KYC procedures in place.

In the last years, cryptocurrency poses a new way of funding terrorism, spurred on by its capacity for simple cross-border transactions. Where the propensity for cheap international transactions is the blessing of cryptocurrency, it’s also the curse that enables virtual money laundering and terror funding.

For cryptocurrencies to reach the level of mass adoption, disrupting the financial sector, there needs to be trust. As virtual currencies and exchanges have a history of hacks and scandals, new customers find it difficult to trust in cryptocurrency. For exchanges to work, people need to trade coins, and to trade coins, customers must trust that their money is safe.

By implementing KYC procedures, exchanges can demonstrate trustworthiness to new users. Identity verification systems not only help exchanges to know who is using their services, sorting the criminals from legitimate customers, it also breeds trusting customers. The AML/KYC solution developed by QOOBISS is designed to comply with the regulatory requirements for a virtual or a crypto wallet and to provide fast onboarding for customers.  “Does crypto wallet need KYC?” is a complex subject.  If you are interested to find out more about, set a meeting with our team.