KYC in Crypto: What Every Crypto Service Should Know About It

With the pseudo-anonymity offered by cryptocurrencies, it has become seemingly easier for criminals to engage in illicit activities. But as the industry matures, regulatory authorities have brought obligatory KYC / AML procedures to the table to combat these risks.

In this article, we will delve into how KYC works for crypto, for what crypto firms it’s a must, and how to implement it if you’re up to this challenge.

The KYC procedure isn’t something specific to the crypto industry. Originating as a regulation for traditional financial organizations, such as banks, it’s now a way to bring crypto out of the shadows and make it more transparent and secure. 

The KYC process typically requires customers to provide personal information, such as their name, address, date of birth, and a government-issued ID. This information is then verified using various methods, such as performing document authentication, running biometric checks, and, where relevant, comparison against trusted data sources. 

KYC also usually includes AML screening, such as sanctions, politically exposed person (PEP), and adverse media checks, to help the business assess whether the customer can be served under its risk and compliance policy. 

Once the customer’s identity has been verified, they will be allowed to use the services they applied for. For example, for buying, selling, withdrawing, or lending cryptocurrencies.

Note that KYC is a legal requirement in many jurisdictions. Failure to comply with KYC regulations may lead to penalties, a complete ban on operations, and even criminal prosecution or sanctions over alleged involvement in money laundering or terrorist financing.

The range of crypto services that may require KYC includes centralized exchanges (VASPs), custodial crypto wallets, and peer-to-peer (P2P) marketplaces. Some other examples of cryptocurrency service providers that may require KYC can also include:

• Fiat on-ramps and off-ramps: Services that let users move between crypto and traditional currencies through bank cards, bank transfers, or payment providers.

• OTC (over-the-counter) trading services. These platforms allow you to execute orders, mostly for larger sums, directly with a counterparty through an OTC desk, as opposed to placing it on auction open for everyone.

• Crypto lending platforms. Such platforms allow users to access loans using cryptocurrency as collateral.

• Payment processors. These services let merchants accept cryptocurrency payments for their goods and services.

• Token sale platforms. These are platforms that allow companies related to cryptocurrency to raise funds by offering interested investors their crypto tokens at early stages.

• Crypto ATMs and kiosks: Physical machines that let users buy or sell crypto, often with cash, cards, or wallet transfers.

• Crypto brokerages and hosted trading apps: Account-based services that give users a managed interface for buying, selling, or holding crypto.

However, it’s not the specific type of service the company provides that obliges it to comply with KYC. The two main factors are:

1. The jurisdiction in which a crypto firm wants to operate;

2. The volume of funds it operates.

Let’s dive a bit deeper into those.

In many jurisdictions, it’s not legal for a crypto firm to operate without implementing some form of KYC process. While specifics of regulations vary by country, all KYC teams can plan around three recurring demands: licensing, AML controls, and traceable transfers.

Many of these local rules are influenced by the Financial Action Task Force (FATF), the global AML/CFT standard-setter. FATF doesn’t license crypto firms directly, but its recommendations shape how countries regulate virtual assets and virtual asset service providers.

It also monitors jurisdictions with weak AML/CFT regimes through its grey and black lists. If a country does not follow FATF standards, it may be placed under increased monitoring or identified as high-risk. That affects not only the country’s reputation, but also how banks and other regulated businesses treat counterparties from that jurisdiction. For example, as of February 2026, FATF called for countermeasures against Iran and the DPRK, and enhanced due diligence for Myanmar.

The US market is one of the most regulated. A vivid example of challenges for crypto firms in the North American market is Binance US. In 2019, Binance had to launch a separate exchange platform to comply with all the requirements (read: continue serving the US market).

In the US, crypto assets fall under the Bank Secrecy Act (BSA). All cryptocurrency exchanges must register with FinCEN and require users to verify their identities to comply with AML and combating the financing of terrorism (CFT) regulations. 

Also, the IRS is one of the main regulators lobbying identity verification in the U.S. For 2025 digital asset transactions, custodial crypto brokers must report gross proceeds on Form 1099-DA; cost-basis reporting applies later to covered assets acquired on or after January 1, 2026.

In addition to federal regulations, there’s state-level licensing requirements. For example:

• New York: To conduct virtual currency business activity, entities can either apply for a BitLicense or for a charter under the New York Banking Law.

• California: The California Department of Financial Protection and Innovation (DFPI) requires most digital asset businesses serving California residents to hold a Digital Financial Assets Law (DFAL) license. Fines for non-compliance can reach up to $100,000 a day.

• Texas: Cryptocurrency platforms generally must hold a Money Transmitter License (MTL) issued by the Texas Department of Banking if they custody customer assets, operate crypto ATMs/kiosks, or deal in stablecoins.

The EU is also an intensively regulated market where fragmented national crypto rules have already moved toward a more harmonized regulatory regime. To date, there have been several important initiatives that affect KYC. 

First is the 5th Anti-Money Laundering Directive (AMLD5), which brought crypto-asset exchange services and custodian wallet providers into the EU AML/CFT perimeter and made them subject to customer due diligence and reporting obligations.

MiCA, the Markets in Crypto-Assets Regulation, now gives crypto-asset service providers a common authorization framework across the EU.

The EU Travel Rule adds a data-quality and traceability requirement to crypto transfers. Under Regulation (EU) 2023/1113, crypto-asset service providers must collect and transmit required originator and beneficiary information for covered transfers, and supporting EBA guidance clarifies the operational information requirements.

In addition, the EU has adopted a new AML package, centered on the Anti-Money Laundering Regulation (AMLR) and the companion directive often referred to as AMLD6. This package will further harmonize customer due diligence, identity verification, beneficial ownership checks, and ongoing monitoring across the EU, making KYC expectations more consistent across member states.

Beyond the US and EU, several other high-impact jurisdictions have well-developed crypto and KYC frameworks that most crypto companies encounter.

The UK has introduced a comprehensive cryptoasset regime under the Financial Services and Markets Act 2000 (Cryptoassets) Regulations 2026. This brings cryptoasset firms into the regulatory perimeter, requiring Financial Conduct Authority authorization for many activities, including:

• Sale or subscription of qualifying cryptoassets to UK consumers (even for overseas firms)

• Operating trading platforms, intermediaries, lending/borrowing, staking, and certain DeFi activities

The new regime will take effect on 25 October 2027.

The UAE is a fast-growing virtual asset market in the Middle East with a multi-layered regulatory framework specifically designed for crypto services.

• At the federal level, Cabinet Resolution No. 111 of 2022 establishes the legal framework for virtual assets and requires AML/CFT compliance and investor protections.

• Capital Market Authority (CMA) regulate virtual asset trading and related financial activities on the mainland, while the Central Bank of the UAE regulates certain stablecoin and payment-token aspects.

In parallel, individual emirates and financial free zones have their own regimes. The Emirate of Dubai, for example, has established the Virtual Assets Regulatory Authority (VARA), which has already issued its Virtual Assets and Related Activities Regulations 2023. 

Singapore's primary crypto regime is the Payment Services Act, under which crypto firms serving Singapore customers must hold a Digital Payment Token (DPT) licence from the Monetary Authority of Singapore. A separate, narrower regime — the Digital Token Service Provider (DTSP) took effect on 30 June 2025 and applies to Singapore-based entities that serve only overseas customers.

Generally, in regulated industries, crypto services cannot legally delay KYC until users reach higher volumes. KYC is the first stage of AML/CFT due diligence, and regulators require firms to verify identity and assess risk before allowing customers to use services.

At the same time, regulators allow a risk-based approach to intensity of checks (simplified vs. enhanced CDD), but not to skip KYC entirely for low-volume users. One of the options is implementing progressive onboarding where users can start with limited features and complete KYC before unlocking full functionality. For example:

The widespread use of KYC by crypto services has raised questions about how identity checks affect the industry. When Binance introduced mandatory KYC, over 96% of its users complied. For ShapeShift, however, KYC cost 95% of its user base, which made the platform pivot their business model to stay afloat.

On the one hand, KYC procedures provide more security for the general public. This leads to a better reputation for the industry and higher adoption of cryptocurrencies by a wider community. By verifying customers, crypto businesses can reduce fraud, identity theft, sanctions exposure, account abuse, and other financial-crime risks.

On the other hand, KYC can create friction for users who value speed, privacy, and the ability to transact without account-based identity checks. In crypto, that concern is stronger than in many other financial services because privacy and self-custody have always been part of the market’s appeal.

However, for most crypto businesses aiming to operate on high-impact markets, “no KYC” is not a realistic growth strategy. If a service holds assets, processes fiat payments, intermediates trades, offers lending or brokerage services, runs token sales, sets limits, or controls access to financial activity, KYC is usually tied to licensing.

The approaches of different services may differ in detail, but generally, KYC in crypto involves four parts: collecting users’ personal information, identity verification, due diligence, and ongoing monitoring.

A user creates an account and provides their personal information, such as name, phone number, address, date of birth, and government-issued identification. 

Some services offer to fill in some fields manually, but most often, this module is semi- or fully automated. For example, personal details can be fetched from an ID document. Note that a data entry automation solution for this purpose should specialize in processing identity documents, as the cost of errors is high.

Toolkit: Data entry automation and extraction tools, OCR (document parsing), biometric data capture module

Once the customer's information has been collected, it must be verified. Verification usually consists of two parts: ensuring the provided ID document is genuine and valid, and confirming that its presenter isn’t an imposter.

Usually, this is an iterative procedure that is conducted with the help of various software solutions. For example, the document verification process powered by Regula includes:

• Automated recognition of document type and country of origin

• Reading and validating all the data, including the data encoded in machine-readable zones, barcodes, and RFID chips; 

• Running cross-checks for the data from all the sources.

When biometric verification is turned on, there’s also face matching and a liveness check.

Toolkit: Document verification software, facial recognition software, liveness check module

The process of due diligence is initiated in case of any red flags detected in the previous steps, for example, if the user has been involved in fraudulent activities, and this fact is known. It can also take place when users exceed a certain amount of cryptocurrency and start to operate with more significant sums. This also requires additional checks that are often called KYC 2. 

The process may involve comparing the information to public records, conducting background checks, and reviewing financial history, as well as manual verification methods, such as calling the customer to confirm their identity in a live conversation. 

One of the common ways to additionally anchor the user with their identity is asking for confirmation of the actual residence address. As a rule, this is confirmed by uploading paid bills for housing, electricity, etc.

Toolkit: Risk assessment software

Approval is not the end of KYC. Crypto accounts can become risky later due to new behavior, new wallets, sanctions updates, account takeover, unusual transaction patterns, or outdated customer data.

Some of refresh triggers include:

• Expired or replaced identity documents

• New residency or tax information

• New device or account recovery event

• Connections to high risk addresses and counterparties

• Sanctions or PEP list update;

• Long account inactivity followed by large movement

• Repeated failed login or biometric attempts

Periodic review should combine time-based review with event-based review so high-risk changes get attention when they occur. In Regula IDV Platform, profile history and session records can help teams review earlier checks when a user requests higher limits, recovers an account, or triggers a wallet-risk alert.

While implementing KYC in crypto is an important and responsible task, it’s not unique. The market for KYC service providers is developed and competitive, so technically, adding a KYC module can be pretty straightforward. 

The solution to this challenge will largely depend on your development ideology. You can opt to ally with a KYC service provider and integrate a ready-made module, or develop it in-house, purchasing various technologies as building blocks to accomplish the task.

If you choose the former, Regula is here to serve you as a reliable technology partner. Having over 30 years of experience in document and identity verification, Regula provides state-of-the-art technologies that let you set up custom verification workflows, ensure security, and instantly authenticate users without adding extra friction to the UX. 

Curious about how Regula IDV Platform can make your business KYC-compliant? Let’s talk.