When signing up for a new cryptocurrency exchange account, you’re likely to be asked for personal information, including your name, address, and Social Security number.
This is part of the exchange or brokerage’s government requirements to know who it’s working with, report tax gains to the IRS, and prevent money laundering.
Keep reading for a deeper look at how this works and what you need to know about KYC and AML for cryptocurrency exchanges.
What Is KYC?
KYC is a term for “know your customer.”
In the finance industry, KYC is an acronym for Know Your Customer. Banks, investment brokerages, cryptocurrency exchanges, and other financial companies are required to collect certain customer information to ensure they only enable customers to use accounts for law-abiding purposes.
While crypto exchanges have some leeway in verifying that their customers are who they say they are, you’ll typically have to submit personal information and perhaps a copy of an ID, to unlock full trading privileges.
If you’re a law-abiding citizen, you shouldn’t have any worries about providing KYC information to a legitimate cryptocurrency exchange or brokerage.
KYC requirements emerged in 2001 as part of the USA PATRIOT Act in response to the September 11 terrorist attacks. As money services businesses, KYC requirements apply to cryptocurrency exchanges in addition to most other banking and investment accounts.
How Crypto Exchanges Use KYC
Cryptocurrency exchanges use your KYC information to verify your identity and provide required tax reports to the IRS. In addition, if you act suspiciously or perform a series of suspicious or extremely large transactions, it may report the activity to the federal government for further tracking and investigation.
For most people, KYC is simply a formality at signup and a way for financial companies to report your profits or losses to the government for tax purposes.
Only rare situations would raise red flags to submit a Suspicious Activity Report (SAR) to FinCEN, a division of the U.S. Treasury Department. For example, a crypto exchange may submit a SAR when it suspects you’re involved in money laundering, tax evasion, terrorist financing, or other illegal activities.
Typical KYC Information For Cryptocurrency Sites
When signing up for a new account with a cryptocurrency exchange, plan to provide the following information (if not more) to open and activate your account fully:
- Legal name
- Physical and mailing address
- Phone number
- Social Security number
Some crypto exchanges or brokerages may ask for additional information such as your employment status, employer, and income. You may also be asked to submit a copy of your photo ID, like a driver’s license or passport.
Some exchanges allow you to open an account with low limits before submitting all KYC information. But again, if you’re not breaking any laws, you should have little worry about providing KYC information to a major crypto exchange in the United States.
Can You Avoid KYC With Cryptocurrency?
While we don’t endorse doing anything to skirt government regulations, cryptocurrency is a unique asset that doesn’t require an account with a centralized exchange. You can use a semi-anonymous cryptocurrency wallet paired with a decentralized exchange to buy and sell cryptocurrency with more privacy.
Using a VPN, or virtual private network, you can trick a decentralized exchange into thinking you’re located in nearly any country. Of course, it’s up to you to decide on the ethics and legality of doing so.
If you do use a VPN and decentralized exchange to buy and sell cryptocurrency without submitting KYC information to a major exchange, you’re still required by law to track your profits and pay capital gains taxes to Uncle Sam.
What Is AML?
AML is a term for “Anti-Money Laundering.”
Financial know your customer requirements are part of a larger umbrella of AML regulations, short for Anti-Money Laundering. These laws are designed to prevent you from becoming the next Walter White (that’s a Breaking Bad reference if you didn’t watch the show) and use a small business, cryptocurrency account, or other methods for money laundering purposes.
The anonymous and decentralized nature of cryptocurrencies like Bitcoin, Ethereum, and Dogecoin makes them an ideal tool for certain criminal uses. Drug dealers, terrorists, and organized crime rings, for example, could use cryptocurrency to send money across borders undetected by government agencies.
AML regulations require financial companies to look out for this behavior to prevent criminal activity from continuing. In most cases, AML and KYC rules are not looking for small tax cheats. The Financial Action Task Force (FATF) focuses on serious criminal enterprises, terrorist organizations, drug cartels, money launderers, and major tax crimes.
Again, it’s important to emphasize that if you’re not doing anything illegal, you have nothing to worry about with KYC and AML for crypto exchanges. They’re a normal part of doing business with any financial company in America.
Staying On The Right Side Of The Law With Crypto
Cryptocurrencies offer unique opportunities for anonymity compared to other financial systems. But that doesn’t mean they’re completely private.
You have little to worry about when you follow the law and understand how KYC and AML policies work. These important financial requirements keep cybercriminals at bay so you can safely enjoy the world of digital currencies.
Eric Rosenberg is a financial writer, speaker, and consultant based in Ventura, California. He holds an undergraduate finance degree from the University of Colorado and an MBA in finance from the University of Denver. After working as a bank manager and then nearly a decade in corporate finance and accounting, Eric left the corporate world for full-time online self-employment. His work has been featured in online publications including Business Insider, Nerdwallet, Investopedia, The Balance, HuffPo, Investor Junkie, and other fine financial blogs and publications. When away from the computer, he enjoys spending time with his wife and three children, traveling the world, and tinkering with technology. Connect with him and learn more at EricRosenberg.com.