KYC (Know Your Customer) is a critical mechanism in the finance and crypto industries for preventing money laundering and protecting data security.
From opening a bank account and online investing to using virtual currency exchanges or participating in digital asset projects, KYC serves as a gatekeeper.
Why is KYC verification so important? How does it work? Read on to understand the verification process, with examples of how major cryptocurrency platforms use KYC to protect users.
What is KYC Verification?
KYC is a process where financial institutions verify a client's identity and review their information before providing services to ensure the security of the financial system.
- Full English Name: Know Your Customer
- Chinese Meaning: 認識你的客戶 (Understand Your Client)
- Origin: Basel Committee’s 1998 Declaration on the Prevention of Criminal Use of the Banking System for Money Laundering
- Purpose: Anti-money laundering (AML) and counter-terrorism financing (CTF)
Regulators like Taiwan’s Financial Supervisory Commission (FSC) continually refine KYC standards to align with international norms and local conditions, promoting digital KYC (eKYC), data sharing, and automated risk controls.
Why is KYC Verification Necessary?
- Prevents illicit funds from entering the financial system, reducing fraud and money laundering risks.
- Enhances transparency of client data and transaction security.
- Ensures compliance with international standards, avoiding penalties.
- Strengthens market trust and stability.
Two Key Stages of KYC Verification
KYC verification involves two main processes:
1. Customer Due Diligence (CDD)
CDD is the process where financial institutions investigate a client’s identity, fund sources, transaction purposes, and behavior patterns before and during a business relationship to assess risk levels and prevent financial crimes.
CDD includes:
- Collecting client data: ID documents verified against the client.
- Verifying fund sources: Occupation, income, and transaction purposes.
- Business client checks: For corporate clients, scrutinizing ownership structures, beneficial owners (>25% stake or control), and business scale.
- Risk classification: Using a Risk-Based Approach (RBA).
2. Enhanced Due Diligence (EDD)
EDD is an advanced review for high-risk scenarios, such as:
- High-risk clients: Politically exposed persons (PEPs), cross-border businesses.
- Suspicious transactions: Unusual activity flagged in Suspicious Activity Reports (SARs).
Financial institutions must also continuously monitor transactions post-KYC and report anomalies.
KYC Applications Across Industries
Taiwan’s FSC mandates KYC for:
| Industry | KYC Use Cases |
|---|---|
| Finance | Account opening, loans, online services, investments. |
| Cryptocurrency | Exchange registration, withdrawals, regulatory compliance. |
| E-commerce/Payments | User sign-ups, transaction verification, fraud prevention. |
Crypto Platforms Must Comply with KYC
Taiwan’s FSC requires all virtual asset service providers to follow KYC regulations. Below are examples of how platforms implement KYC:
Binance Exchange
| KYC Tier | Requirements | Access |
|---|---|---|
| Basic | Personal info | Buy/deposit crypto (daily limit: 0.06 BTC). |
| Intermediate | ID + facial recognition | Trade/withdraw (daily limit: 100 BTC). |
| Advanced | Address proof + 10-day review | Unlimited withdrawals. |
MAX Exchange (Taiwan)
| KYC Tier | Requirements | Access |
|---|---|---|
| Lv.0 | None | View market data only. |
| Lv.1 | Email/phone + ID | Deposit/withdraw crypto, trade. |
| Lv.2 | Bank account linkage | Fiat transactions (NTD deposits/withdrawals). |
Pi Network
| KYC Tier | Requirements | Access |
|---|---|---|
| Unverified | None | Earn temporary Pi (non-tradable). |
| Verified | Phone + ID | Transfer Pi to mainnet for trading. |
FAQs
1. What does KYC mean?
KYC ("Know Your Customer") is a mandatory identity verification process to prevent fraud, money laundering, and illegal activities.
2. Why is KYC important in crypto?
It prevents illicit fund flows and enhances transparency in an anonymous market.
3. How long does KYC take?
Varies by platform (e.g., Pi Network: 1–7 days).
Conclusion
KYC is foundational for financial security, especially in crypto’s high-risk environment. Platforms like Binance, MAX, and Pi Network use tiered KYC to unlock functions progressively, safeguarding users and building industry trust.
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