Trading, or the regular exchange of financial securities, is an active market where money and the ownership of assets are constantly transferred from one person to the next. In a marketplace of hyperactivity, like trading, tracking monetary transactions is essential to prevent money laundering, fraud, and other forms of economic crime. To keep trading platforms safe and combat financial crime, potential traders must first be verified as defined by KYC regulations.
Implementing KYC (Know Your Customer) and KYB (Know Your Business) in trading is vital for the security of the exchange platform and its users, as well as for market stability and the economy as a whole. Illicit activities can lead to dangerous situations that may affect small to large sectors of company stakeholders and the population. Therefore, KYC and KYB procedures are in place to ensure secure trading around the globe.
KYC - Know Your Customer
KYC, or "Know Your Customer", is a set of regulatory guidelines that outline customer identity verification procedures within a company or financial institution. While KYC may be adhered to as an individual protocol, it generally falls under the policy of broader Anti-Money Laundering regulations (AML). The implementation of use-case appropriate KYC procedures, such as KYC in trading, is mandatory among financial institutions and other companies or organizations.
The KYC framework can be broken down into three categories: Identity Verification, Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD). These three steps ensure that a customer's identity is real, no financial risks are associated with them, and any potential misconduct in their financial transaction history is immediately detected and reported.
KYB - Know Your Business
Know Your Business (KYB), also known as Corporate KYC, is a regulatory framework similar to KYC. Naturally, KYB regulations differ from KYC in that they are intended for B2B relations and interactions. Corporations can present serious risk factors that banks, investment firms, crypto platforms, trading marketplaces, and other companies would not want to get involved in.
Thus, it is imperative that companies considering a B2B relationship that involves monetary transactions carry out a thorough investigation of the potential partner company prior to acceptance and onboarding.
KYC in Trading
Trading is the active buying and selling of financial assets or commodities. Among the various forms of trade, one of the most common is equity trading, or the buying and selling of stocks, bonds, and securities. However, all forms of trade require a KYC or KYB Check and EDD. Today, there are two locations of trade: floor trading, which accounts for an ever reducing population of traders, and electronic trading, which is the majority of trading nowadays.
An online brokerage is the digital marketplace for trading. When a customer decides to create a brokerage account, they first have to complete a KYC Check. KYC in trading varies from brokerage to brokerage. Some adhere to stricter guidelines than others. Offshore brokerages, for example, also require a KYC Check but tend to be more slack in their requirements. However, this is should not be mistaken as an indication of secure trading, since they are known to be riskier. When choosing an online brokerage, one with stricter KYC policies and a good reputation is the best option for trading.
A financial market describes the trade of financial assets and instruments. There are four general financial markets in which a person can trade: Capital Markets, Currency Markets, Derivative Markets, and Money Markets.
A KYC Check is a three-step process. For the initial onboarding of a customer, the first two steps, Customer Identification Program and Customer Due Diligence, are performed to confirm the customer's true identity and establish a risk profile. Based on the outcome of these two steps, companies can then make an informed decision on whether they wish to proceed with the onboarding process or terminate it.
The extensiveness of a KYC Check varies from customer to customer. For those who present an elevated risk factor, more research and in-depth verification are required to assess whether a business relationship is reasonable and worthwhile.
Customer Identification Program
CIP is the process of verifying a customer’s identity. With the help of official government-issued identification documents (e.g., birth certificate, driver’s license, or passport) and facial recognition, a customer’s identity can be verified. This also eliminates the risk of identity fraud.
Customer Due Diligence
CDD is the process of researching the customer's legal history for the purpose of establishing a customer risk profile. Following the verification of the customer's identity, proving the legitimacy of their documentation, and assessing their risk profile, an account for that customer may be created at the discretion of the financial institution or company.
Enhanced Due Diligence EDD is the maintenance of KYC policies once an account has been created. EDD ensures that account transactions are continuously monitored, and any suspicious activity is flagged immediately and reported to the appropriate regulatory authority.
KYB Checks generally follow the same process as KYC Checks, except with more extensive document requirements, such as articles of incorporation and official business registrations or shareholder registries. They require a much more sophisticated corporate investigation.
All financial institutions are obliged to comply with KYC regulations. However, with the advancement of technology, KYC requirements have expanded beyond the world of finance. Identity theft is a widespread issue that negatively impacts many industries. Therefore, it is not only important to adhere to KYC guidelines, but more specifically to choose the correct KYC procedures for your business and use case to avoid the consequences of non-compliance.
To best prevent the various forms of financial crime, those entering into work relationships that involve financial transactions are responsible for the proper investigation of potential clients in advance. Furthermore, if suspicious activity is detected but not reported, those responsible for reporting will be held liable. Non-compliance with KYC regulations may result in substantial fines and harm the company’s reputation.
In today's economy, there are innumerous KYC or KYB service providers with multiple use-case solutions for companies and institutions to choose from. KYC service providers can help companies navigate the KYC process and develop a fully compatible and compliant solution for their customers.
At PXL Vision, our industry experts are able to provide guidance to ensure you choose the right KYC procedures for your business to comply with your respective local KYC jurisdiction. We aim to instill confidence in the protection of your company and customers while simultaneously scaling your business. We will be able to advise you on requirements for KYC in trading, as well as any other use cases you may have.
KYC and KYB Checks are mandatory to prevent identity theft or money laundering and protect stock exchange platforms and brokers. These procedures are in place to keep trading secure around the globe.
The duration of a KYC or KYB Check is dependent upon two major factors: the speed of the KYC service provider platform and the risk assessment of the customer or business. The higher the potential risk, the longer the check will take.
The documents generally required for a KYC Check include a government-issued ID (e.g., license, birth certificate, passport, etc.), proof of address (POA, e.g., utility bill, lease agreement, etc.), and a clear photo of the customer's face. In some cases, proof of income (POI) may also be requested.