What Is KYC In The Crypto Space?

KYC means to know your customer. It is a popular concept in the traditional banking industry, and financial regulators have widely enforced it. They use it mainly to counter money laundering and ensuring that customers are regulatory compliant.

The cryptocurrency industry also leverages the same concept for similar reasons. For example, crypto exchanges, custodial services, and digital wallet services implement KYC measures to verify the crypto holder's identity. The information gathered through KYC allows the crypto services to better understand the client's activities, thus determining whether users are engaged in legal or illegal activities. KYC is one of the tools that crypto exchanges have been using in their arsenal against money laundering.

What you need to know about the KYC process

Most people use crypto exchanges to buy crypto, especially those who prefer to have their money in cryptocurrency form rather than putting it in the bank—many of them trade crypto, similar to how one would trade fiat currencies.

There are three main KYC categories; acceptance policy, transaction monitoring, ID procedures, and risk management. These categories or measures are the reason that crypto exchanges usually require proof of address or ID verification. They often require that you provide details such as your full name, phone number, and address. They will also likely require copies of legal documents such as a copy of your passport or ID. Some may even require you to upload a copy of a bill as proof of address.

What is the role of KYC in the crypto?

Cryptocurrencies became quite popular in the past few years. Governments and traditional banking institutions heavily opposed digital currencies initially because they were decentralized, and that paved the way for rampant money laundering. It was a massive challenge to governments t, and it highlighted the need for some regulation to combat money laundering.

Governments could not ban cryptocurrencies since they are digital, and they are decentralized. The only option available was to ensure crypto regulation by requiring crypto exchanges to implement KYC and other regulatory measures. For example, any crypto exchange that wants to operate in the U.S market or any other market has to adhere to the guidelines provided by that particular jurisdiction.

If you look back over the past few years, there has been a lot of hacking against crypto exchanges, and traders lost significant cryptocurrency amounts. Governments also sought to regulate exchanges so they could protect crypto investors. The governments introduced strict safety requirements for exchanges so that they could prevent further hacking. This approach gave governments more leeway to push the KYC agenda.

KYC vs. anonymity

Bitcoin is still the most popular cryptocurrency, and it is also commonly used for illegal activities. It became so popular because people could discretely transact online. Still, with KYC measures in place, people are growing concerned that the anonymity factor that made crypto appealing is starting to fade.

The fading anonymity allowed governments to implement taxation policies on cryptocurrency gains. The exchanges have to be regulatory compliant, and so they can provide any required user information. The government can then use the provided information to determine whether you have been making profits through crypto and whether you have been paying taxes on those gains. The same user information allows the government to determine whether you have been conducting illegal businesses online.

Die-hard Satoshi fans would likely oppose KYC because it goes against Satoshi Nakamoto’s expectations for Bitcoin and the crypto market in general. The Bitcoin founder's goal was to create a system independent of government control, but governments have now started controlling the cryptocurrencies through regulatory measures and policies like KYC.

Although the anonymity concept seems quite appealing to many, perhaps it is dystopian to think that such a system would function without problems such as crypto theft, and that is why KYC exists. For anyone opposed to KYC because it threatens anonymity, perhaps it is better to consider it as a necessary evil rather than the lousy hand ruining the game.

It became abundantly clear that crypto theft was one of the significant problems plaguing the cryptocurrency world, thus necessitating better solutions. Regulations have proven quite useful in preventing crypto theft, but the tradeoff is that customers who want to use this safer approach also have to subscribe to the KYC requirements.

What about decentralized exchanges

In case you are still opposed to KYC, but you still want to enjoy all that crypto has to offer while still enjoying anonymity and security, perhaps you should consider looking into decentralized exchanges or DEX. A DEX is a type of crypto exchange that does not have a central authority, and thus there are no KYC measures. They feature peer-to-peer marketplaces built directly on a blockchain. The goal is to extend blockchain's immutability to exchanges, and this approach also allows traders to be the custodians of their crypto holdings.

DEXs have no KYC measures. They might be a better approach for anyone that does not want their data held in a centralized service. One would thus expect DEXs to be quite popular. However, they are not, and perhaps it has something to do with people looking for the kind of security that centralized exchanges offer.

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