AML and KYC in Cryptocurrency

Anti-Money Laundering (AML) and Know-Your-Customer (KYC) rules aim to prevent illicit finance while keeping markets safe. In crypto, the same principles apply—identity verification, ongoing monitoring, and reporting—adapted for blockchains, self-custody, and global networks.

1) AML Fundamentals (Risk-Based Approach)

• Risk assessment: Classify customers, products (spot, derivatives, privacy features), geographies, and delivery channels (CEX, OTC, P2P) by inherent risk.
• Controls: Sanctions screening, transaction monitoring (KYT), EDD for higher-risk users (e.g., large volumes, PEP exposure), and suspicious activity reporting to authorities where required.
• Governance: Written policies, training, audit trails/logging, and a designated compliance officer with clear escalation paths.

2) KYC Essentials (Who You’re Dealing With)

• Identity collection: Legal name, DOB, address, and government ID. For entities: registration documents, beneficial ownership (UBO), and control structure.
• Verification: ID liveness checks/biometrics where permitted, database lookups, and document authenticity checks.
• Ongoing KYC: Periodic refresh based on risk score; trigger refresh after material changes (usage spikes, new jurisdictions).
• Data minimization: Collect only what’s necessary; store securely with limited access and clear retention/deletion schedules.

3) KYT: Transaction Monitoring on Chain

• Heuristics & analytics: Screen deposit and withdrawal addresses for sanctions, mixers, ransomware tags, or darknet links.
• Behavioral rules: Velocity alerts, structuring/smurfing patterns, sudden volume spikes, or high-risk counterparties.
• Case management: Investigate alerts with a ticketing workflow; document narrative, evidence, and final disposition.

4) CEX vs. DEX, Self-Custody & the Travel Rule

• Centralized exchanges (CEX): Usually conduct full KYC/AML, sanctions screening, and Travel Rule compliance for qualifying transfers between VASPs.
• Self-custody & DEX: Non-custodial tools complicate counterpart identification; some regions propose rules for VASP-to-unhosted-wallet due diligence.
• Travel Rule basics: For covered transfers between regulated VASPs, transmit originator/beneficiary info alongside the transfer via compliant messaging rails.

5) Privacy, Security & Practical Tips for Users

• Prefer reputable platforms with clear privacy policies, security certifications, and breach-response commitments.
• Share KYC documents only through official portals; avoid email attachments/DMs.
• Use strong auth (app-based 2FA or security keys) for exchange accounts and email.
• Keep audit-ready records (deposits, withdrawals, txids) to simplify compliance and tax reporting.

Summary

AML/KYC in crypto follows a risk-based model: verify identity, screen transactions, monitor behavior, and report when required—while protecting user data. CEXs shoulder most obligations; self-custody and DEX usage introduce new compliance patterns. Good hygiene and careful data handling benefit both platforms and users.

What's Next

Continue to Security Tokens and ICO Regulations to explore token classification, offering rules, disclosures, and the practical implications for issuers, platforms, and investors.