Suppose you are a crypto exchange or blockchain project operating in Canada. In that case, you must be aware of the Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations that you must comply with. KYC and AML are core components of the financial system, and understanding these requirements is essential for any crypto exchange or blockchain project to ensure legal and regulatory compliance. By familiarizing yourself with the KYC/AML requirements in Canada, you can protect yourself and your business from potential risks and ensure that you operate safely and securely. This article will explain the kinds of KYC/AML you need to do if you are a crypto exchange or blockchain project in Canada.
What is KYC/AML?
KYC is an abbreviation for “Know Your Customer”, a concept designed to help businesses identify and verify their customers’ identities and determine the risk level associated with doing business with them. AML is an abbreviation for “Anti-Money Laundering”, a set of processes designed to help financial institutions identify and minimize the risk of being used for money laundering. KYC and AML are important components of a country’s financial system, as they protect financial institutions and help prevent money laundering and other financial crimes. KYC and AML are also important for Canada’s crypto exchanges and blockchain projects. Failing to comply with these requirements can result in hefty fines, reputational damage, and even the shutdown of your business.
Identifying and Verifying the Customer
As a crypto exchange or blockchain project in Canada, you must verify the identity of each of your customers. This means you must obtain and keep detailed records on each customer’s identity, source of funds, and intended use of any crypto or blockchain-related products or services. If your business is a crypto exchange, you must perform enhanced due diligence on any customers categorized as “high risk”, including those who are Politically Exposed Persons (PEPS) with a previous record of money laundering or terrorism or are otherwise considered a risk. If your business is a blockchain project, you must perform basic due diligence on each customer, including verifying the customer’s identity, source of funds, and intended use of your platform. As a blockchain project, you must also be aware of your obligations under the Personal Information Protection and Electronic Documents Act (PIPEDA). You must comply with the applicable requirements in the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) Handbook.
Ongoing Monitoring
Once you have identified and verified your customers, you must monitor their activities and transactions on an ongoing basis. This means that you must keep detailed records of their transactions, and you must be able to identify the nature and source of each transaction. You must also be able to identify any unusual or abnormal transactions which may indicate something suspicious or illegal. If your business is a crypto exchange, you must monitor all transactions, including deposits, withdrawals, and customer transactions. Transactions between customers include transactions where one customer sends crypto or blockchain-related goods to another or vice versa. If your business is a blockchain project, you must monitor all transactions, including transferring tokens or other blockchain-related goods.
Customer Due Diligence
As a crypto exchange or blockchain project in Canada, you must perform customer due diligence if your customers are categorized as “high risk”. Customer due diligence means you must obtain more information and perform more rigorous identification, source of funds, and intended use of your products or services. You must obtain and keep detailed records of your customer due diligence, and you must be able to identify any increased risk associated with your customers.
KYC/AML Requirements in Canada
As a crypto exchange or blockchain project in Canada, you must comply with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) Handbook. Under section 9 of the FINTRAC Handbook, all crypto exchanges and blockchain projects must comply with the applicable KYC/AML requirements. Specifically, section 9.11 of the FINTRAC Handbook states that a crypto exchange must perform the following procedures: – Identify and verify its customers: Crypto exchanges must identify and verify the identity of their customers, including the sources of the funds used to purchase any crypto or blockchain-related products or services. – Perform ongoing monitoring: Crypto exchanges must monitor their customers’ transactions and identify and report any suspicious transactions. – Perform customer due diligence: Crypto exchanges must perform customer due diligence on all customers categorized as “high risk”.
Risk Assessment
As a crypto exchange or blockchain project in Canada, you must perform a risk assessment to determine the risks associated with your customers. Once you have identified and assessed the risks, you must develop and implement a risk management plan to mitigate these identified risks. Crypto exchanges and blockchain projects are expected to have a robust anti-money laundering and know-your-customer (AML/KYC) compliance programs to prevent and detect suspicious activity, including money laundering and terrorist financing, promptly.
Record Keeping
All customer due diligence records must be kept for five years, and all records of your ongoing monitoring must be kept for one year. All records must be kept in a secure location, and all records must be easily accessible by FINTRAC for review. All customer due diligence records must be kept for five years, and all records of your ongoing monitoring must be kept for one year. All records must be kept in a secure location, and all records must be easily accessible by FINTRAC for review.
Reporting Suspicious Activity
As a crypto exchange or blockchain project in Canada, you must report any suspicious activity to FINTRAC. This means that you must report any transactions, attempted transactions, or other suspicious activities, such as a high-value transaction made by a customer attempting to use your services for money laundering. All reports of suspicious activities must be made following section 10 of the FINTRAC Handbook. The FINTRAC Handbook lists the following examples of suspicious activity: – A customer being unable to explain the source of their funds – A customer claiming that they are buying crypto or blockchain-related products or services for another person when they are purchasing them for themselves – A customer attempting to transfer large sums of money in a way that is designed to avoid detection – A customer attempting to use your services to launder their funds – A customer attempting to use your services to finance terrorism.
Why is KYC Important for Crypto Exchanges?
The KYC procedures you need to follow as a crypto exchange will depend on the type of business you operate. If you are an investment business, you must comply with the specific KYC/AML requirements laid out by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). Alternatively, if you are a non-reporting business, you must comply with the Know Your Client Identification Rules (KYCID). KYC is extremely important for crypto exchanges because it enables you to: – Identify your clients – You need to identify your clients to confirm their identities and understand their risk profile. – Understand your client’s risk profile – You need to understand your client’s risk profile to adequately assess and manage the risk they pose to your business. – Verify your clients’ identities – You need to verify your clients’ identities so that you can ensure they are who they say they are.
How KYC Helps with Anti-Money Laundering?
KYC procedures help with AML compliance by enabling you to identify your clients and understand their risk profiles. This, in turn, enables you to understand your client’s financial activities and detect suspicious activity. KYC helps with AML compliance by enabling you to: – Identify your clients – You need to identify them so that you can confirm their identities and understand their risk profiles. – Understand your client’s risk profile – You need to understand your client’s risk profile to adequately assess and manage the risk they pose to your business. – Verify your clients’ identities – You need to verify your clients’ identities so that you can ensure they are who they say they are. – Detect suspicious activity – You need to detect suspicious activity so that you can report it to FINTRAC and shut down any illegal financial activity. – Report suspicious activity – You need to report suspicious activity to help shut down any illegal financial activity. – Shut down any illegal financial activity – You need to shut down any illegal financial activity so that you do not create any financial risk for yourself or your clients.
How KYC Benefits Crypto Traders?
KYC procedures help you understand and manage your client’s risk profile. This, in turn, helps you to identify and detect any suspicious activity. KYC can benefit crypto traders by enabling you to: – Identify your clients – You need to identify them so that you can confirm their identities and understand their risk profiles. – Understand your client’s risk profile – You need to understand your client’s risk profile to adequately assess and manage the risk they pose to your business. – Verify your clients’ identities – You need to verify your clients’ identities so that you can ensure they are who they say they are. – Detect suspicious activity – You need to detect suspicious activity so that you can report it to FINTRAC and shut down any illegal financial activity. – Report suspicious activity – You need to report suspicious activity to help shut down any illegal financial activity. – Shut down any illegal financial activity – You need to shut down any illegal financial activity so that you do not create any financial risk for yourself or your clients.
What Are Standard KYC Procedures?
The following are the standard KYC procedures you must follow as a crypto exchange: – Client Identification – You must identify your clients to confirm their identities and understand their risk profiles. – Client verification – You need to verify your clients’ identities to ensure they are who they say they are. – Determination of risk – You need to understand your client’s risk profile to adequately assess and manage the risk they pose to your business. These KYC procedures are standard for any business that operates as a financial institution under the PCMLTFA. If you are a crypto exchange or blockchain project in Canada, you need to be aware of the KYC/AML requirements and comply with them. Following the standard KYC procedures can protect your business and stay compliant with the law.
Conclusion
There are many KYC/AML requirements that crypto exchanges and blockchain projects must comply with to operate in Canada:
- You must identify and verify each customer and monitor their transactions.
- You must perform customer due diligence and determine the risk associated with each customer. You must also perform a risk assessment to determine the overall risks associated with your business and develop and implement a risk management plan to mitigate those risks.
- You must report any suspicious activity to FINTRAC.
- Once you have identified and addressed the KYC/AML requirements that you must comply with as a crypto exchange or blockchain project in Canada, you will be able to protect yourself and your business from potential risks and operate safely and securely.
Harrison Jordan is a lawyer based in Toronto, Canada that can assist you with your legal needs in respect of KYC / AML as well as cryptocurrency related matters. Fill out the form or call him today.
