There are signs that regulators across the world are also looking to enforce KYC registrations on private wallets in order to clamp down on money laundering and terrorism financing (ML/TF).
06/19/2022
At present, both hot and cold wallets offer enhanced anonymity for users, as there is no Know-Your-Customer (KYC) identification required or enforced as with exchange accounts. This is something that may very well change in the coming years, as there are signs that regulators across the world are also looking to enforce KYC registrations on private wallets in order to clamp down on money laundering and terrorism financing (ML/TF).
Coupled with exponential progress in Know-Your-Transaction (KYT) blockchain analytics by companies like Chainalysis and Elliptic, trying to hide your crypto from the tax man, in the long run, may very well be a costly exercise in futility.
Hot wallets also have the most operability out of all forms of cryptocurrency storage. Users can quickly connect their hot wallets to various DeFi protocols and exchanges and immediately trade tokens, view privileged information, or access staking pools or yield farms.
Cold wallets on the other hand usually require the physical device to be connected via USB or Bluetooth, have their PIN entered, and then the correct app selected before signing a transaction or connecting to a website. Going through so many steps may be ok with a long-term holder or someone with a sizable portfolio, but not for swing traders that make many transactions per day.
What Is Know Your Customer (KYC)?
Short for Know Your Customer, this process refers to a financial institution’s obligation to verify the identity of those who use its platform.
Also dubbed Know Your Client, KYC is a crucial part of measures designed to prevent money laundering and terrorism financing.
KYC is a standard practice in the investment industry to ensure that advisors know specific information about their clients — meaning it extends beyond crypto exchanges.
These things can include a client’s investment knowledge, risk tolerance, personal details and financial position. From a crypto perspective, this usually involves requesting photo ID such as a passport or driver’s license.
It is very common for credit companies, banks and insurance agencies to conduct KYC and to require customers to provide all necessary information.
This aims to ensure the customers are not part of corruption or bribery.
KYC policies have risen in importance particularly in the global finance world to prevent illegal transactions.
The policies give financial institutions a blanket of protection to ensure their business is being conducted legally.
KYC processes usually begin with collecting basic data and information about customers in a process known as electronic identity verification.
Details such as a user’s name, birthday, account number and social security details can all be valuable pieces of information when detecting any fraudulent activity or financial crime.
After receiving this information, organizations usually check a database of individuals convicted for corruption to see if any customers may overlap.
The information is often also compared against a list of sanctions or a list of politically exposed persons.
Once that is done, organizations can gauge the level of risk involved in their customers engaging in any corrupt or fraudulent activity.
Crypto exchanges have come under increasing pressure to roll out KYC, amid fears that criminals may be using digital currencies to evade detection.
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