The Application and Challenges of KYC and eKYC in Virtual Asset Trading

In the financial sector, understanding Customer ( KYC ) and electronic Know Your Customer ( eKYC ) is a crucial process. These procedures are not only regulatory requirements but also essential for preventing financial crimes such as money laundering and terrorist financing. With the rise of virtual asset trading, these concepts and practices from traditional finance are gradually being introduced into the Web3 world.

The Essence and Purpose of KYC

KYC is not just about collecting basic information from clients; it is more important to understand the client's background and assess the potential risks involved. Financial institutions need to conduct due diligence to verify whether the client has ever participated in money laundering activities or has connections with high-risk individuals. This process involves collecting identification documents, proof of address, etc., and verifying and assessing risks through a back-end team.

Regulators pay special attention to how financial institutions obtain, use, and verify customer information. They need to ensure that institutions can identify whether a customer is on a sanctions list or is a politically exposed person. This often requires the use of third-party independent databases for comparison and in-depth due diligence.

eKYC: A New Way to Improve Efficiency

With the development of technology, eKYC has emerged. It allows customers to remotely complete identity verification through mobile devices, greatly shortening the account opening time and improving user experience. eKYC utilizes artificial intelligence technology to verify the authenticity of identification documents and ensures the identity of the operator through methods such as video verification. This approach not only facilitates customers but also reduces the operational costs for financial institutions.

AML and CTF: The Core Objectives of KYC

Anti-money laundering ( AML ) and counter-terrorism financing ( CTF ) are core objectives of the KYC process. Financial institutions need to ensure that the source of customer funds is legitimate and avoid providing funding support for terrorist activities. This requires a comprehensive review of the customer’s background, including checking whether they are on various sanction lists or associated with high-risk individuals.

Establishing and maintaining such a database is a complex task that requires collecting information from multiple sources, including official sanction lists, law enforcement wanted notices, and media reports. This process still requires human involvement to ensure the accuracy and timeliness of the data.

KYC Challenges in the Web3 World

The rapid development of the Web3 ecosystem has brought new challenges. Although decentralization is one of the core principles of Web3, with the maturation of the industry and the occurrence of some adverse events, the introduction of appropriate regulations and KYC measures has become an inevitable trend. This is not only necessary to protect investors' interests but also an essential path for the industry to move towards normalization.

On a technical level, how to associate a blockchain wallet with a real identity is a problem that needs to be solved. One possible solution is to issue special tokens to users' wallets as a proof of identity verification after completing KYC. However, this method still requires supporting measures to prevent risks such as wallet theft.

Balancing Regulation and User Needs

For cryptocurrency companies and exchanges, balancing regulatory requirements and user needs is a key challenge. They need to:

1. Promote eKYC to improve efficiency and user experience.
2. Improve the efficiency of the KYC process to cope with large-scale user growth.
3. Ensure that KYC technology and processes comply with regulatory standards.

As a potential Web3 hub, Hong Kong's infrastructure needs continuous upgrades to meet industry demands. For exchanges that are applying for licenses, obtaining the license is just the starting point; effectively operating on a compliant basis is the long-term challenge.

As the Web3 industry continues to evolve, KYC and eKYC will also evolve to adapt to new technological environments and regulatory requirements. Finding a balance between protecting user privacy and ensuring financial security will be a continuous challenge faced by this industry.