Sunday, August 14

What is KYC and AML in cryptocurrencies and why is it so important?

KYC (Know Your Customer) and AML (Anti-Money Laundering) are two key concepts for the future of cryptocurrencies and their regulation. KYC is the identification process that a customer goes through when opening an account on a cryptocurrency exchange and is one of the fundamental parts in the Anti Money Laundering (AML) regulations. Although these controls can help the mass adoption of cryptocurrencies, many people consider that they violate the basic principles of anonymity and decentralization of crypto assets. Therefore, regulations should strike the perfect balance between privacy and auditability.

What is KYC and AML

If you’ve opened an account with a centralized crypto exchange like Coinbase or Binance, you may have already gone through a KYC process. The purpose of the KYC is to confirm who the customer behind the account is and to prevent illegal activities such as money laundering or tax evasion. KYC processes are common in financial services companies or cryptocurrency exchanges, since if they do not carry it out, the platforms could be directly responsible for these illegal activities. In fact, most providers of this type of service carry out the verification process before allowing the client to carry out any type of operation.

Spain will require balances, exchanges, collections and payments with cryptocurrencies

To complete the identification process, it is necessary to provide personal data, such as full name, place of residence and address. In addition, these data must be confirmed by attaching a photo of an identity card or passport that verifies the information provided. Therefore, in some exchange, the KYC process can take hours or even more than a day.


The objective of the AML regulations is to prevent users from carrying out money laundering operations. That is, to prevent funds obtained from illicit activities from circulating through the financial system. In this case, by the crypto-financial system. Since its origins, cryptocurrencies have been associated with this type of activity, mainly, for 3 reasons. Transactions can be carried out completely anonymously, the transactions are irreversible and the most important: cryptocurrencies remain unregulated in most countries in the world.

KYC and AML regulations

For now, despite the lack of clear regulation, most of the laws passed related to crypto aim to comply with the KYC and AML processes. In Europe, the Fifth Directive against money laundering (5AMLD), approved on January 10, 2020, requires crypto exchanges operating in the European Union to submit information to the competent authorities about their clients. They also request diligence checks on suspicious users. The United States updated its anti-money laundering and terrorist financing laws last January to include cryptocurrencies.

Spain approves tomorrow Law that requires reporting on cryptocurrency holdings

In Spain, the Commission of the Congress of Deputies approved in May a new regulation against Tax Fraud, through which information on cryptocurrency holders, balances and operations is required.


Due to these regulations, aimed at controlling all customer movements, many people are suspicious of CBDCs (Central Bank Digital Currencies) and the possible elimination of cash. In fact, according to one query conducted by the ECB on the digital euro, privacy was the most valued quality. The search for privacy presents a huge challenge, as it involves finding the balance between privacy and auditability.

China, one of the countries that has advanced the most with its CBDC, proposes controllable anonymity. Small value transfers will be anonymous and large value transactions will be controlled. However, this type of measure is only possible with CBDCs, since they are stable currencies issued by Central Banks. Due to this danger, the Chinese government last May prohibited financial institutions from operating with the rest of the cryptocurrencies. A measure that obviously stops any possible development of cryptocurrencies in the future.


The possibilities and risks of digital currencies are huge both ways and finding a balance is not easy. As indicated by Joan Tugores, Professor of Economics at the University of Barcelona. “It would be almost a sarcasm that one of the initial ideas of cryptocurrencies, that of leaving money and its use out of the control of governments, ends up giving way to digital currencies that, especially in environments with little respect for individual rights, the exact opposite happens: a big money brother, an Orwellian 1984 who has an unprecedented total control path in the monitoring of transactions ».

The debate around this issue focuses on finding a balance between providing some anonymity and ensuring compliance with fundamental rules in areas such as the fight against money laundering, the fight against terrorist financing and tax evasion.

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