What you need to know: KYC and AML

It goes without saying that in any type of trading - especially if we’re talking about online exchange of cryptocurrencies - safety is the number one priority.

If you’re wondering how your data can be safeguarded and your funds preserved from scams, the “Know You Client” (or “Know Your Customer”) and the “Anti Money Laundering” regulations are your heroes.

What's the Difference Between KYC and AML?

Even though closely related, there is a difference between the two: in banking, KYC rules are the steps institutions must take to verify their customers' identities; AML operates on a broader level they are the measure institutions take to prevent and combat money laundering, terrorism financing, and other financial crimes.

Banks use KYC and AML compliance to maintain secure financial institutions.

KYC: Know Your Client

It’s a standard in the investment industry that ensures the knowledge of detailed information about clients’ risk tolerance - it’s the degree of variability in investment returns that an investor is willing to withstand in their financial planning - investment knowledge, and financial position.

KYC regulation protects both clients and investment advisors: clients are protected by letting their investment advisors know what investments best suit their personal situations; while Investment advisors are protected by knowing what they can and cannot include in their client's portfolio.

The compliance typically involves requirements and policies such as risk management, customer acceptance policies, and transaction monitoring.

The Know Your Client (KYC) rule is an ethical requirement for those in the securities industry who are dealing with customers during accounts opening and maintenance. There are two rules which were implemented in July 2012 that cover this topic together: Financial Industry Regulatory Authority (FINRA) Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability):

  • Know Your Customer Rule 2090: every broker-dealer should use reasonable effort when opening and maintaining client accounts. All data and essential facts have to be recorded and if some authority is acting on the customer’s behalf, they must be identified.
  • FINRA Rules of Fair Practices, 2111: a broker-dealer must have reasonable grounds when recommending what is suitable for a customer based on the client’s financial situation and needs. This responsibility means that the broker-dealer has done a complete review of the customer’s current facts and, including other securities before making any purchase, sale, or security exchange.

Requirements for KYC Compliance

The U.S. Financial Crimes Enforcement Network (FinCEN) has set baseline requirements for KYC in conjunction with the core requirements for the due diligence program. To prevent money laundering, financial institutions are required to conduct deeper assessments of their clients' risk profiles.

Customer Profile

Investment advisors and firms are responsible for knowing each customer's financial situation by exploring and gathering the client's age, other investments, tax status, financial needs, investment experience, investment time horizon, liquidity needs, and risk tolerance.

The SEC requires that a new customer provides detailed financial information that includes name, date of birth, address, employment status, annual income, net worth, investment objectives, and identification numbers, before opening an account.

KYC in Cryptocurrency

Cryptocurrency is praised for being decentralized and a medium of exchange that promotes confidentiality; however, these benefits also present challenges in preventing money laundering. Criminals see cryptocurrency as a means of furthering their illegal activities and as a vehicle to launder money; as a result, governing bodies are looking for ways to impose KYC on cryptocurrency markets, requiring cryptocurrency platforms to their customers much like financial institutions.

Although not yet mandatory, many platforms have implemented KYC practices.

Because crypto-to-crypto exchanges don't deal with traditional currency, they do not have the same pressures to employ KYC standards as with exchanges that deal with Fiat currencies.

Fiat-to-crypto exchanges facilitate transactions involving fiat currencies and cryptocurrencies. Since fiat currency is the official currency of a nation, most of these exchanges employ some measures of KYC. Fortunately, financial institutions should have already vetted their customers according to KYC requirements.

In pills:

(from Investopedia)

  • Know Your Customer (KYC) are a set of standards used within the investment and financial services industry to verify customers, their risk and financial profiles.
  • In the investment industry, KYC stipulates that every broker-dealer should use reasonable effort regarding client accounts.
  • The Financial Crimes Enforcement Network (FinCEN) established minimum KYC requirements, including verifying beneficial owners and setting standards for dealing with third parties.
  • The SEC requires that a new customer must provide detailed financial information before opening an account.
  • The cryptocurrency market is not obliged to employ KYC standards, although some have to.

Know Your Customer (KYC) are a set of standards and requirements that investment advisors and financial services companies use to verify the identity of their customers and any associated risks. KYC also ensures investment advisors know detailed information about their clients' risk tolerance and financial position.

The U.S. Financial Crimes Enforcement Network (FinCEN) prescribed rules financial institutions must follow when verifying the identity of customers and their beneficial owners, if any. They must verify the circumstances around the customer relationship, as well as monitor and report any suspicious or illegal activity.

Focus is shifting to cryptocurrency markets as pressures to conform to KYC standards increase.

AML: Anti Money Laundering

Anti Money Laundering (AML) refers to the laws, regulations, and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income.

It became a global prominence in 1989, when a group of countries and organizations around the world formed the Financial Action Task Force (FATF). Its mission is to devise international standards to prevent money laundering and promote their implementation. In October 2001, following the 9/11 terrorist attacks, FATF expanded its mandate to include combating terrorist financing.

Another important organization in the fight against money laundering is the International Monetary Fund (IMF): it has pressed its member countries to comply with international standards to thwart terrorist financing.

AML laws and regulations target criminal activities including market manipulation, trade in illegal goods, corruption of public funds, and tax evasion, as well as the methods used to conceal these crimes and the money derived from them.

One rule in place is the AML holding period, which requires deposits to remain in an account for a minimum of five trading days. This holding period is intended to help in anti-money laundering and risk management.

AML compliance officers are often appointed to oversee anti-money laundering policies and ensure that banks and other financial institutions are compliant.

Addressing Suspicious Activity

It's up to financial institutions to monitor customer deposits and other transactions to ensure they aren't part of a money-laundering scheme. The institutions must verify the origin of large sums, monitor suspicious activities, and report cash transactions exceeding $10,000. In addition to complying with AML laws, financial institutions must ensure clients are aware of them.

In today's regulatory environment, extensive records are kept on just about every significant financial transaction.

How money is laundered and how can it be stopped

One common technique to launder is to run the money through a legitimate cash-based business owned by the criminal organization or its confederates: the supposedly legitimate business deposits the money, which the criminals can then withdraw. Otherwise, money launderers may also sneak cash into foreign countries to deposit, deposit cash in smaller increments to avoid arousing suspicion, or use illicit cash to buy other cash instruments. They will sometimes invest the money, using dishonest brokers willing to ignore the rules in return for large commissions.

Unfortunately, money laundering cannot be completely stopped but only reduced through constant vigilance.

Financial institutions can monitor customer deposits and other transactions to ensure they aren't part of a money-laundering scheme.

In pills:

(from Investopedia)

  • Anti Money Laundering (AML) seeks to deter criminals by making it harder for them to hide ill-gotten money.
  • Criminals use money laundering to conceal their crimes and the money derived from them.
  • AML regulations require financial institutions to monitor customers' transactions and report on suspicious financial activity.


About EDSX


Based in Zug, the platform is fully compliant with all Swiss laws related to financial intermediaries, banking, anti-money laundering, and organized trading facilities. Among its core values, there are innovative solutions through blockchain technology, which ensures security and liquidity.

EDSX is the first platform in Europe with primary and secondary markets for both institutional and retails. EDSX is a pioneering platform that employs the world’s leading technology to globally list security tokens in both primary and secondary markets, listing digital securities of real financial instruments to the public with a decentralized peer-to-peer exchange. Our goal is to fully compromise every aspect of the financial revolution.

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