The cryptocurrency ecosystem is a sea of key acronyms you must understand, and it may feel daunting to learn them all. However, you will hear two terms from the ecosystem from time to time: AML and KYC.
Anti-Money Laundering (AML) and Know Your Client (KYC) are two regulatory processes in the cryptocurrency business that aim to prevent financial crime and encourage transparency.
But how do their scopes differ?
What Is AML in Crypto?
AML is an abbreviation for Anti-Money Laundering. AML refers to procedures and regulations that prevent criminals from utilizing cryptocurrency to conceal the proceeds of unlawful activities, often known as money laundering or washing.
It is a process in which thieves disguise the proceeds of unlawful activity to appear to have come from legitimate sources. They may spend and invest money without raising eyebrows with this masquerade. Because of its anonymity, cryptocurrency appeals to criminals as a means to wash (launder) money.
To counteract unlawful activities with cryptocurrency, countries enacted regulations and processes requiring crypto exchanges and other businesses that deal in crypto transactions to take anti-money laundering measures. Government entities that monitor AML regulations include the Financial Crimes Enforcement Network (FinCEN) in the United States, and the Financial Intelligence Unit (FIU) in the European Union, the Financial Conduct Authority (FCA) in the United Kingdom,.
They put in place regulations to verify the identity of those who deal in cryptocurrency, monitor their activities, and report any suspicious conduct that may indicate money laundering to the appropriate authorities.
What Is KYC in Crypto?
KYC stands for Know Your Customer. It refers to the procedures used by financial institutions that deal with cryptocurrencies to prevent identity theft, fraud, and other criminal activities by validating your identity.
By gathering your personal information and government-issued identification documents, cryptocurrency exchanges want to ensure that you are who you say you are and not a fake criminal. Your information is compared to public records, or background checks are run to verify your identity.
You are provided limited access to their services once your identity has been validated. Furthermore, proof of income or address grants you unrestricted access to their services.
When signing up new users, top cryptocurrency exchanges like Binance, Coinbase, and Kraken go through this process. A crypto exchange that lacks KYC should raise red bells about its legitimacy. It is worth noting that KYC regulations vary by country and location. Some regions may be more or less strict when it comes to KYC.
What Are the Similarities and Differences Between AML and KYC?
At its most basic, AML and KYC strive to prevent illicit activities in the cryptocurrency sector. However, while AML focuses on preventing money laundering, KYC focuses on preventing fraud and other illegal activities. In addition, both collaborate to ensure that cryptocurrency is utilized legally.
To better comprehend this, envision AML and KYC as a team of detectives working tirelessly to apprehend the criminal actors in the cryptocurrency sector. AML is the field investigator on the hunt for money launderers. In contrast, our office-based KYC investigator handles the paperwork of checking IDs to ensure that no one is using false identities to commit illegal activities. They are a powerful squad that ensures the crypto world is safe, regardless of where they get to execute their jobs.
One significant difference that should be noticed is its execution. AML regulations are typically implemented worldwide by government entities such as the Financial Action Task Force (FATF). However, financial institutions (such as cryptocurrency exchanges or banks) are responsible for implementing KYC. This is an important aspect of risk management methods.
AML and KYC Are Two Sides of a Coin
The scope of Anti-Money Laundering and Know Your Customer differs. Still, the end purpose is to prevent financial crimes and promote transparency and legitimacy in the crypto ecosystem.