Know Your Customer (KYC) in Crypto: MiCA and Malta’s Regulatory Perspective

KYC in cryptocurrency refers to the process by which platforms verify the identity of their users and gather relevant background information. The aim is to ensure every customer is legitimate and not involved in illicit activity.

The KYC process typically involves collecting personal details such as a name, date of birth, and address, and confirming them through official documents or reliable databases. This approach, adopted from financial institutions, is vital in the crypto space because blockchain transactions allow a degree of anonymity.

Without KYC, crypto transactions could take place with little traceability, enabling money laundering, fraud, terrorist financing, and other illegal activities. By enforcing KYC checks, crypto platforms improve transparency and accountability, strengthening trust with users and regulators.

MiCA makes KYC requirements a central part of the compliance framework for crypto-asset service providers (CASPs). KYC measures not only fulfil legal obligations but also safeguard market integrity and consumer protection.

Crypto exchanges and other CASPs integrate KYC verification into their onboarding process through a structured identity verification workflow.

When a new customer signs up, the platform usually requests a government-issued ID, such as a passport or driving licence, and proof of address, such as a utility bill. Many exchanges also use biometric verification, for example a selfie or live video, to confirm the customer matches the provided ID.

After verifying identity details, exchanges conduct further due diligence. This includes screening against sanctions and politically exposed persons (PEP) lists and carrying out a risk assessment.

Once approved, customers can access trading features, but the KYC process does not end at onboarding. Crypto exchanges must monitor customer activity continuously, using automated KYC tools and transaction monitoring systems to flag suspicious or high-risk behaviour.

Under the EU’s TFR 2 regulation, the Travel Rule applies. This requires MiCA-licensed firms to share details of the sender and recipient when transferring crypto assets to another CASP, ensuring transparency in crypto transactions.

Under the EU’s 5th Anti-Money Laundering Directive (AMLD5), effective from January 2020, cryptocurrency exchanges and custodian wallet providers are classified as “obliged entities” under AML and counter-terrorist financing laws. These entities must perform customer due diligence, monitor transactions, and report suspicious activity in the same way as other financial institutions.

In Malta, virtual asset service providers are directly subject to the Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR). This means crypto businesses must comply with all AML and KYC standards. The Financial Intelligence Analysis Unit (FIAU) has also issued binding Implementing Procedures Part 2 for CASPs.

MiCA requires CASPs to demonstrate robust KYC and AML systems before obtaining a licence. Regulators may consult the FIAU to ensure applicants have no record of facilitating illicit activity. Failure to comply with KYC and AML requirements can lead to suspension or revocation of a licence.

The FIAU has identified key elements for crypto firms to meet KYC and AML compliance requirements:

Customer Risk Assessment — evaluating each customer’s risk profile, including source of funds, jurisdiction, and nature of activities

Identity Verification and Screening — checking official documents and conducting sanctions and PEP screening

Transaction Monitoring — using automated systems to detect unusual or high-risk crypto transactions

Reporting Obligations — submitting Suspicious Transaction Reports (STRs) to the FIAU when there are reasonable grounds to suspect money laundering or terrorism financing

Staff Training and Governance — training employees on AML and KYC procedures and maintaining strong internal controls led by compliance officers

In practice, this combines manual reviews with automated KYC software, verification tools, and case management systems. A well-designed approach to KYC compliance allows crypto businesses to identify customers, verify their funds, detect suspicious behaviour, and maintain an audit trail for regulators.