In places like the U.S., Australia, and the U.K., KYC methods are now required for any crypto platform that wants to offer services. This is because regulators are paying more attention to private crypto transactions.
As the crypto world grows and changes, global and national financial officials are putting more and more pressure on digital asset service providers to follow the same rules as traditional financial institutions. The ongoing conversation about how to balance privacy and security in cryptocurrencies is a vital subject. But it is essential to realize that putting the right “know your customer” (KYC) procedures in place is crucial to stop the illegal use of digital assets.
What Exactly Does the Term KYC Mean?
KYC is a term for “know your customer,” one of the most important things to do in cryptocurrencies. The term refers to a financial institution’s responsibility to do due research on its customers by checking their names and backgrounds before giving them access to a product or platform. This is part of a more extensive set of measures that officials worldwide use to fight against money laundering.
In short, using legal money transactions makes it harder for bad people to hide where their money came from.
Conflicts Arise Between KYC and Cryptocurrency Exchanges
The KYC process has recently become a major legal issue for crypto businesses. Because the market needs to be more organized, it is more likely to have problems with KYC. Many autonomous services are built so users can stay anonymous and keep their personal information safe from any central authority. The current situation means that many crypto businesses need help finding out who their customers are, which is something that regulatory bodies don’t like.
Even the most hesitant crypto businesses have had to adopt increasingly strict Know Your Customer (KYC) processes because regulators are keeping a closer eye on them and giving them more punishments.
- A crypto market is where digital assets can be bought and sold. In August 2021, Binance made it so new customers had to show a government-issued ID and pass a face authentication test before making payments or trades. After the United Kingdom and Japan made their legal announcements, Binance was told it wasn’t allowed to do business in their countries, among other things.
- A place where you can buy and sell financial items whose value comes from cryptocurrencies. BitMEX took a similar step to comply with KYC a year ago, requiring information on trade skills and identification. This was done in part to be prepared for the changing regulatory situation. Before, the only thing that people had to do was give an email address.
Despite these efforts, federal officials charged BitMEX with multiple regulatory violations at the end of 2020, especially for not having strong enough KYC measures. The following year, the same company announced its user registration procedures had been completed successfully. This was followed by a critical $100 million agreement with regulatory authorities.
KYC rules don’t apply to decentralized exchanges (DEXs) because they don’t need a central trade desk to work. This means that identities don’t have to be revealed. Because they are neither an intermediary nor a counterparty, the institutions that make DEX can get around legal systems. Using the DEX’s core infrastructure, the site lets its users trade with each other directly.
ShapeShift has dropped by 95% since KYC steps were implemented, according to the company’s CEO. Protocols for verifying people’s identities were implemented in 2018 after The Wall Street Journal said the exchange was involved in money laundering. The business denied this, so the protocols were put in place. In 2021, ShapeShift changed its operating framework and rebranded itself as a decentralized exchange (DEX) to get around KYC laws.
Why Is It Necessary to Have KYC for Crypto?
By putting in place KYC compliance measures, bad things that happen outside of the Bitcoin world, like ransomware attacks that block a user’s access to a computer or network until payment is made, can be stopped. Last year, bad people used the fact that decentralized coins are hard to track down to avoid being caught and get almost $350 million in cryptocurrency from their victims.
According to a study from the Ransomware Task Force in 2021, which is a group of public and private experts from around the world, the crypto industry has made it easier for these kinds of attacks to happen and has suggested, among other things, that KYC rules be put into place more strictly.
Adopting Know Your Customer (KYC) processes has a lot of potentials to change how people think about cryptocurrency in the larger economy. Better compliance measures, like more robust identification methods, could make it easier to separate cryptocurrency from activities like money laundering and other illegal ones that are thought to be linked to it. This could make people more likely to use and spend in the market.
Getting Used to Having to Deal With KYC
Know Your Customer (KYC) is a problem in the Bitcoin business that is being worked on by several new companies—a cutting-edge business dealing in name verification. Passbase offers an advanced way for mobile apps to quickly verify a user’s identity by letting them submit a picture and their ID papers. The company has raised $13.5 million through seed and Series A deals.
Burrata, a company for identifying people that just got seed funding, lets people put “digital identity tokens” on their Bitcoin wallets. This way can help other cryptographic businesses avoid storing user information on their servers, which goes against their decentralized ideals.
Even though these tools may make it easier for many crypto businesses to comply, they can’t fix the fact that some crypto groups are ideologically opposed to identity verification methods.