KYC - Know your Customer | KYC - Know your Cryptocurrency

Cryptocurrency has been here for a while. We’ve all heard of Bitcoin, Ethereum and Litecoin. We may have heard how Tesla’s founder Elon Musk turned Dogecoin from an obscure digital currency to a speculator's dream through his Twitter posts

Published on 10 NOVEMBER 2021 | 4 mins read

The financial press has been flooded with cryptocurrency news over the last two-three years. Between 2012 and 2020, Bitcoin, which has around 50% market share in the cryptocurrency market, has grown by an astounding 193639.36%

Reports indicate that India has the largest number of cryptocurrency holders in the world - 10.07 crore. The US is second with 2.74 crore, followed by Russia at 1.74 crore and Nigeria at 1.30 crore. 

The stupendous growth of cryptocurrency hasn’t gone unnoticed. Fast and secure KYC processes are also increasingly relevant for cryptocurrency exchanges to preserve and maintain funds invested by credible investors, and to establish faith in them. 

In this blog, we shed some light on the exponentially growing cryptocurrency, the existing regulations regarding cryptocurrency, the need for an elaborate KYC process and the KYC process itself in much detail and how Karza Technology can be a TSP to cryptocurrency exchanges. 

Fun Fact: The most traded cryptocurrencies in India over the past six months were meme coins, led by the Elon Musk-backed Dogecoin and its trending rival Shibu Inu over cryptocurrencies such as Bitcoin, Ethereum, and MATIC in terms of trading volume.

What is Cryptocurrency?

To understand cryptocurrency, we must first understand how blockchain technology works.

A blockchain is a digital ledger that is stored and maintained by a decentralized network of computers. This means that all transactions recorded on the ledger are independently verified and recorded by every computer on the network, ensuring that they cannot be tampered with or reversed by any single person. Blockchains collect information in groups called blocks, each encapsulating a list of transactions executed on the blockchain. When a block is filled, it is closed and linked to the previous block, forming a chain of blocks i.e. a ‘Blockchain. 

Cryptocurrency is a form of digital currency that was originally created as a monetary incentive for computers on the network to validate the transaction. A cryptocurrency may be an asset, currency, utility, or security.

It is envisioned by its proponents that cryptocurrency will supplant traditional currencies such as dollars, euros, pesos, rupees, etc in the distant future. Cryptocurrency has no physical counterparts such as banknotes or coins that can be exchanged or used, so it is completely electronic.

Key Features of Cryptocurrencies

Let us discuss the major distinguishing features of cryptocurrencies:


The cryptocurrency depends on peer-to-peer networks. In cryptocurrency, blockchain technology facilitates the transfer of value peer-to-peer, obviating the need for a centrally controlling entity. The decentralized system avoids fraud as well as any third-party intervention, preserving the integrity of data and transaction security. Users can send and receive cryptocurrency directly between each other without a central bank or authority intervening. 


Cryptocurrency transactions are public and accessible to the public. The user behind a specific account is unlikely to be determined as the components of cryptocurrency, such as addresses, private and public keys, and transactions are all read in text strings, such as public addresses that are in no way traceable and trackable to anyone’s personal identity. 

But you can track transactions and monitor the amount of money flowing through the system.


Open the cryptograph, and you will be able to see a private key that is impossible to crack if you keep it safe. Additionally, cryptocurrency transactions cannot be reversed. As a transaction occurs on the cryptocurrency network, it is recorded in the blockchain. Reversing it means tampering with most of the blockchain nodes, which is an infeasible feat.

Are cryptocurrencies legal tender?

Cryptocurrencies, by their nature, cannot be owned or controlled by a single, centralized entity. Given the nascency of the technology, governments are still effectuating governing regulations, which tend to vary widely across the world. In India, neither the Government nor the Reserve Bank of India recognizes or issues cryptocurrency as legal tender. There is also no law that prohibits or permits trading in cryptocurrencies. They function similarly to gold, commodities, and real estate, as assets. People can trade gold without the government regulating it.

Regulations for Cryptocurrency in India

In India, Bitcoin and other legal currencies remain outside the scope of legal regulation. However, the government is working on a regulatory framework.

Jayant Sinha, chairman of India's Parliamentary Standing Committee on Finance, explained the unique approach to crypto regulation in India at a marquee event.

It was confirmed that Indian crypto policies will not follow the models of countries like the United States, El Salvador, or Japan since there is no full capital account convertibility in India. Full account convertibility permits the exchange of a nation’s official currency with foreign currency without any restriction on the amount.

India’s cryptocurrency policy is likely to be drafted around the following core values:

  • It will be dictated by national security concerns, emphasizing the need for stringent vigilance against the exploitation of cryptocurrencies and crypto-assets for terror financing and domestic security threats.
  • It will strike a balance between stability and growth.
  • It will be regulated as an asset or commodity in India and governed by the prevailing legal framework. 

The government is in the final stages of crafting regulations for cryptocurrencies in India and had earlier stated that the primary goal of the cryptocurrency bill would be to determine cryptocurrency on the basis of use cases.

KYC in Crypto

KYC is the comprehensive, intricate process of verifying a customer's identity and other pertinent information. This is a law-abiding requirement, most commonly with banks, financial institutions, and now cryptocurrency exchanges. However, the KYC protocol is not legally binding on cryptocurrency exchanges in India.

KYC is done to confirm that a customer is who he claims to be. In the past, cryptocurrency was seen as a lucrative option for financial offenders and money launderers due to its anonymous nature, making it impossible to trace funds back to their original users. To combat this, cryptocurrency exchanges have started conducting KYC checks. In case a cryptocurrency exchange does not carry out adequate KYC checks, it can face penalties from statutory authorities or even closure if found guilty of any such illegal activity. 

Why is KYC needed in Cryptocurrency?

  • Recent bullish trends in crypto markets are one of the primary reasons for the increase in interest in KYC in cryptocurrency. An explosion in the price of cryptocurrencies causes a rapid increase in the number of users wishing to get in on the action. Platforms often fail to manage the operational strain caused by the overflow of new users. KYC checks are conducted to limit the number of users who are seriously interested in investing in cryptocurrency.

  • One of the key reasons is the possibility of money laundering and illegal funding. Bitcoin and other cryptocurrency transactions laundered an estimated $3.38 billion in 2019 alone, highlighting the need for KYC audits to be conducted.

  • Furthermore, in light of the ever-increasing interest from non-crypto participants towards this market, regulators are exercising caution in light of the unprecedented growth of crypto assets.


KYC Process in Cryptocurrency

It involves the collection and verification of the user’s data. 

For example, KYC is required for users of CoinSwitch Kuber before they can trade on their platform. CoinSwitch requests PAN and AADHAAR numbers, followed by a selfie. Similarly, WazirX, another cryptocurrency exchange in India, has a process that completes KYC within a few minutes of signing. 

To verify account details, some exchanges use the penny drop method, transferring Re 1 to verify the account details. For corporate clients and those seeking higher transaction limits, they may seek additional documents.

There are alternate more secure methods that can be adopted to onboard new clients. One of these is Karza Technologies’ state-of-the-art solution Video KYC that includes: secure audio-visual interaction for real-time collection of pertinent data, and real-time authentication and verification of client information. With Karza Technologies' Total KYC solution, cryptocurrency exchanges can collect documents, extract relevant information, and verify user identities using that information.

Monitoring is key to ensuring KYC information is current and gives the system the ability to identify any suspicious activity. Cryptocurrency exchanges flag out multiple large transactions that are flagged suspicious and inform the relevant authorities. 

Challenges in KYC in cryptocurrency

Many cryptocurrency users oppose increased regulatory scrutiny, for reasons ranging from ideological to criminal. Many users do not want regulators and statutory authorities breathing down their necks: to them, sharing valuable personal data contradicts the premise of cryptocurrency, which is anonymity in cryptocurrency transactions with no central authority intervening.  

Unlike stocks at a stock brokerage, you can retrieve and withdraw cryptocurrencies and store them in an outside wallet. Cryptocurrency wallets, work just like traditional wallets, except they hold digital cash instead of hard cash or paper notes.

Cryptocurrency wallets are susceptible to immense risk because no KYC is performed for any subscription. It enables money launderers to hide their ill-gotten gains anonymously, since there may be no association between them and the wallet in which they hold their cryptocurrency. Implementing an effective regulatory structure and analyzing patterns of fraudulent behavior in these wallets is going to be crucial to the development of the Web3 ecosystem.  


The crypto market is expected to continue its meteoric rise in financial terms. Despite this, the rules of the game are changing as there is an increase in cryptocurrency exchanges and a new set of investors are coming in.

Cryptocurrency exchanges are doing everything they can to put KYC checks in place to confirm the identity of the user and disincentivize money launderers and financial criminals to move dirty money into the blockchain ecosystem through corrupt, illegal means.