What Is KYC/AML?
KYC (Know Your Customer) and AML (Anti-Money Laundering) are regulatory compliance frameworks requiring financial institutions to verify customer identities and monitor transactions for suspicious activity. In crypto, KYC/AML is increasingly required for centralized exchanges, RWA products, and regulated DeFi offerings.
KYC Requirements
Identity Verification
- Government-issued ID (passport, driver's license)
- Proof of address (utility bill, bank statement)
- Selfie verification (liveness check)
- Social Security Number or tax ID
Enhanced Due Diligence
For higher-risk customers or larger transactions:
- Source of funds verification
- Source of wealth documentation
- Business relationship purpose
- Ongoing monitoring
AML Components
Transaction Monitoring
- Suspicious activity detection
- Pattern analysis
- Threshold reporting
Sanctions Screening
- OFAC (US) compliance
- International sanctions lists
- Politically exposed persons (PEP) checks
Suspicious Activity Reports (SARs)
Financial institutions must file SARs for potentially illicit activity.
KYC/AML in Crypto
Centralized Exchanges
All major CEXs (Coinbase, Kraken, Binance) require KYC for:
- Account creation
- Fiat on/off ramps
- Higher withdrawal limits
RWA Products
Tokenized securities and treasury products require KYC:
- Reg D compliance
- Investor accreditation verification
- Geographic restrictions
DeFi and KYC
Most DeFi protocols remain permissionless, but some trends:
- Institutional pools with KYC (Aave Arc)
- RWA products with gated access
- Compliant stablecoin issuers
Travel Rule
FATF Travel Rule requires transmitting customer information for transfers above thresholds, affecting crypto transfers between VASPs (Virtual Asset Service Providers).
Privacy Considerations
KYC creates tensions with crypto's pseudonymous nature:
- Data breach risks
- Centralization of identity data
- Exclusion of unbanked populations
- Privacy concerns
Compliance Solutions
- Identity verification services (Jumio, Onfido)
- On-chain compliance (Chainalysis, TRM)
- Zero-knowledge KYC solutions (emerging)