Three Ways KYC Defends Crypto Marketplaces From Financial Crime

The crypto space has become popular not only for cryptocurrency enthusiasts but, unfortunately, for cybercriminals and fraudsters as well. Therefore, most crypto exchanges and marketplaces today employ know your customer (KYC) procedures.

Although money services providers and other financial institutions (FIs) are required to adhere to KYC procedures, not everyone understands the importance of KYC.1 This article explains the basics of KYC and how KYC can defend crypto exchanges from financial crime.

KYC in a Nutshell

KYC is a process where FIs gather information about their clients to comply with legal and financial requirements and regulations. Most FIs use KYC to verify their customers’ identities before allowing them full access to their products and services. This is one of the most effective ways to identify customers with possible connections to corruption, money laundering, terrorism, among other financial crimes.

KYC may seem overwhelming at first, but it is not difficult to understand. Most of the time, global-reaching companies’ KYC procedures are designed in a standardized way for customers from well-developed countries. Thus, people from countries with different economic situations may have difficulties finishing KYC procedures.

The information commonly obtained includes, but is not limited to, the following:

  • Full name
  • Address of residency
  • Date of birth
  • Government-issued identification (e.g., driver’s license, passport)

How KYC Reduces Financial Crime Risks in Crypto Marketplaces

The following are three common ways KYC shields crypto exchanges against fraudulent attacks.

1. Identifying and Verifying User Identities

As previously mentioned, applying KYC procedures is an initial requirement for a client to have full access to a company’s products and services. Through KYC, crypto exchange platforms can identify customers with malicious intents before they enter the marketplace, which is important for bitcoin trading to avoid2 having bad actors on the platform.

One of the common characteristics of users with malicious intent is they try to avoid being identified. KYC allows platform administrators to match up user accounts with an identifying document, increasing the chances of legally apprehending bad actors should they be caught on their malicious activities.

2. Monitoring User Accounts and Transactions

If there are any suspicious transactions involving an account on a KYC-compliant exchange platform, the account owners can be easily identified and tracked for investigation.

Cryptocurrency, not being fully regulated or still not having a standard form of regulation, naturally attracts fraudsters and scammers. No one wants to be a victim of malicious activities—especially in crypto marketplaces as there are large amounts of crypto funds stored in millions of bitcoin wallets.3

If any suspicious behavior on a platform was proven to have malicious intent, then the owners of those accounts should brace themselves for the next possible steps—banning, freezing or suspending accounts. In most cases, it will depend on the exchange platform.

3. Providing Confidence for Every Cryptocurrency Transactions Made

Imagine being able to trade confidently without worrying about a trade partner’s intentions. Knowing that a trading partner has gone through a certain level of identification and verification boosts confidence that they do not have any malicious intent. Some marketplaces even allow traders to restrict their trade offers to verified users only to decrease risk. Crypto exchanges are now confident that their traders are safe from bad actors.

Although most marketplaces do not impose KYC as a barrier to access the platform, there are certain restrictions over their services that can only be lifted by going through different KYC procedures. Some marketplaces impose different levels of KYC procedures where every time a user completes a level, restrictions are lessened or more relaxed.

With the reduced possibility of risks on the platform, everyone can focus on what really matters—scouting and grabbing every trade opportunity possible.

KYC Is Here to Help

These are just a few ways KYC can help create a safer trading environment, but the list goes on! KYC can be tedious but knowing what it is and how it can help guard funds and enrich the trading experience should help in understanding its importance.

Patricia De Leon, copywriter, Paxful,

  1. “Everyone Is Talking About KYC: What It Is and Why It’s Beneficial for You,” Paxful, February 4, 2020,
  2. “A Helpful Intro to Arbitrage Trading in Crypto,” Paxful, April 13, 2020,
  3. “Get your free, secure bitcoin wallet,” Paxful ,

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