The requirement came out of banking regulation and spread to crypto exchanging. The point is that a transaction should have a known participant: an anonymous flow can be neither verified nor disputed.
What is usually asked for
A passport or ID, sometimes a photo holding the document. Less often, proof of address. How much depends on the amount: small exchanges often go through with no verification at all, large ones almost never do.
What happens to this data
It is stored, and there is an obligation to protect it. Worth remembering when choosing a service: documents handed to a platform with no name and no address are protected by nothing, and you cannot take them back.
How long it takes
Usually from a few minutes to a day. Automated checks answer almost at once, manual review takes longer, and that is exactly where unreadable photos, cropped document edges and flash glare end up.
Why people are refused
Most often because of photo quality, not suspicion. The second most common case is a name mismatch: the card is in one person's name and the document in another's. Settlement with a third party is almost always stopped, and that is not fussiness but a direct requirement of the rules.
If verification is not passed, the funds do not disappear: they are returned to the sender's address minus the network fee.
Read more: Why the bank asks about a transfer smaller than 400 thousand