What is KYC in Crypto?

With all that is happening in the world, as well as new technologies, many people are turning to cryptocurrency exchanges to invest their money. Considering crypto’s decentralized economy, however, many users have a problem when it comes to KYC.

KYC, aka, know your customer, refers to a cryptocurrency exchange’s obligation to perform certain identity and background checks on its customers before allowing them to use their platform. KYC is used to deter money laundering and other illegal activities that may occur when using crypto exchanges.

KYC is required by many cryptocurrency exchanges in the U.S. and is used to combat potential money laundering activities in the crypto space and beyond. The problem is that many people who are currently involved in crypto and its surrounding technology are all for decentralization, which revolves around anonymity.

For crypto exchanges, KYC is a way to identify and confirm that a customer is who they say they are. It’s a multi-step process that helps to prevent the creation and use of fraudulent accounts.

Some of the most popular cryptocurrency exchanges including Coinbase, Binance, Kraken, and Gemini abide by KYC regulations to stay compliant with the law.

That is why you will notice that many crypto exchanges require your name, DOB, address, a copy of your ID, as well as a picture of you holding your ID to prove it’s not stolen.

Cryptocurrency exchanges require KYC to establish the legitimacy of a customer's identity and identify risk factors. KYC procedures help prevent identity theft, money laundering, financial fraud, terrorism financing, and other financial crimes.

Moreover, cryptocurrency’s decentralized aspect opens the door to even more financial crime opportunities. If you know the government, they like to have their hands in just about everything, and in the case of KYC and crypto, even more so.

If crypto exchanges didn’t adhere to KYC law, they’d simply be breaking the law and would be heavily fined for their negligence. 

A prime example of this comes from BitMEX, the cryptocurrency and exchange derivative platform that was fined a hefty $100 million by the Commodity Futures Trading Commission (CFTC), in August 2021, for failing to implement anti-money laundering and KYC programs.

That being said, we can’t be mad at the cryptocurrency exchange, they’re just abiding by the law.

It goes without saying that there are many pros when it comes to KYC in crypto, including:

• KYC limits fraud caused mostly by identity hiding
• KYC prevents money laundering and other illegal financial behavior
• KYC increases the country's stability and investment by making the financial structure more trustworthy and less volatile
• KYC reduces the uncertainty and helps institutions to lend more to clients while increasing profits
• KYC helps investors assure the security of their personal data and prevents fraudsters from gaining access to their accounts
• KYC enables clients to recover their accounts if access is lost
• Without KYC, vendors have no idea who their consumer is, making it impossible for them to defend themselves from harmful behavior.

KYC doesn’t only benefit exchanges and the government, more importantly, they protect the customers who are using these crypto exchange platforms.

From assisting in a swift recovery of stolen funds to allowing customers to exchange larger sums of money in a single transaction, KYC is beneficial for everyone.

Given the digital state of crypto, and all that’s involved in the new digital economy, some may argue that KYC has cons as well, such as:

• KYC is seen as an extra hurdle to accessing the cryptocurrency and Web3 space
• Investors may be concerned about the privacy and security of their personal data as a result of the KYC procedure

If you ask me, the pros of KYC far outweigh the cons, especially when it comes to crypto. Most of us will just have to learn to live with KYC laws until something better is implemented.

Otherwise, there are some options to completely avoid KYC when it comes to cryptocurrency exchanges.

Keep in mind that KYC is a good thing for users of crypto exchanges, but, if you are completely against KYC, I understand.

Always do your own research before trading any kind of cryptocurrency and make sure you’re aren’t breaking any local laws. This article is strictly for entertainment purposes only.

To avoid KYC in crypto, you will need to find a non-custodial crypto exchange (custody of the wallet is 100% in your control). A good non-custodial crypto-exchange platform encrypts private communication, keeping your fiat-based identity secret.

Although I won’t mention any specific non-custodial exchanges here, they do exist. I’m going to leave it up to you to find one that works best for you and your situation. 

Also, keep in mind that laws and regulations are always changing. So, just because a crypto exchange advertises no KYC, that doesn’t mean it will stay that way.

More and more crypto exchanges are beginning to implement KYC due to the government cracking down on exchanges that don’t currently perform KYC checks.

As the crypto space continues to evolve and become adopted by the masses, I expect the government to get involved as much as possible.

That being said, I think KYC is a good thing overall, but only time will tell if there are better options to achieve the same results, with less invasion of customers’ privacy.