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What Is KYC and Its Importance for Crypto Exchanges?

Privacy and security have become an ongoing debate in digital asset services, especially in cryptocurrency. Therefore, financial regulators in several countries, such as the U.K., Australia, U.S., have adopted KYC measures to prevent any illicit activity in crypto transactions.

For this reason, it is not surprising that today many people start looking for information on "What is KYC crypto?" or "What is the importance of the KYC measure in crypto exchanges?". Considering how vital the KYC is in the current crypto industry, we've arranged this article for those in need of understanding it.


What is KYC Crypto? 


Know Your Customer Crypto

KYC, or Know Your Customer, refers to financial institutions' obligation before giving customers access to their platforms or products. The measure in question here is about checking the customer's identity and background before granting access to them. Thus, using KYC aims to prevent fraudulent actions in using crypto exchanges, particularly those related to money laundering. In short, KYC can stop someone from hiding their illicit money after legal, financial activities.

In applications on crypto exchanges, KYC can also be a multi-step process that prevents the use or creation of a fake account. That is why many crypto exchanges currently ask customers to submit requirements such as name, address, DOB, a copy of the government-issued ID, or a photo when users hold their ID card.

Related Article WARNING! Is Your Crypto Wallet Safe? Study Here!


Why Does KYC Matter for Crypto Exchanges?


KYC Matter for Crypto Exchanges

Of course, the answer is because KYC helps crypto firms to identify risk factors and confirm the legitimacy of a customer's identity. By applying the KYC procedure, cryptocurrency exchanges can prevent financial crimes, such as terrorism financing, identity theft, financial deception, and money laundering.

Unfortunately, the decentralized economy is, by nature, the root of the regulatory hurdle of KYC. It is because many decentralized services still allow their customers to remain anonymous or are designated to keep their customer's personal information private from every prominent authority. That action is unacceptable for any financial regulator due to the company's inability to identify who its customers are.

In addition to customer security issues, some countries enforce strict KYC laws in crypto exchanges. If crypto exchange platforms do not comply with the established KYC rule, they can be subject to hefty fines. The experience of BitMEX in 2021 can certainly be an example that every crypto firm must comply with KYC regulations. In August 2021, the Commodity Futures Trading Commission (CFTC) fined BitMEX $100 million for failing to implement the regulator's KYC and anti-money laundering program.

A similar case also happened to Binance. In August 2021, this crypto exchange provider suddenly announced that users had to pass facial verification and present a government issued I.D. to make trades or deposits. The announcement came after Japanese, and U.K. financial regulators stated that Binance was not legal to operate in their countries due to lacking KYC application.

However, decentralized exchanges (DEXs) do not require a KYC check. Those who trade via smart contracts instead of a central trading desk can declare no identity. Institutions that create DEX can bypass it because they aren't financial counterparties or brokers. The users can exchange their assets straight with one another by employing the infrastructure provided by the DEX.

Related Article Decentralized vs Centralized Blockchain: Learn the Difference!


Pros and Cons


Using KYC

Pros of using KYC in crypto


When it comes to the benefits of KYC procedures in cryptocurrency exchanges, you will find many pros, namely:

  • - Limit any financial fraud, especially those caused by hiding actual identity data
  • - Prevent money laundering and other illegal actions related to digital asset transactions
  • - Increase investment opportunities and economic stability in a country by demonstrating more trusted and reliable financial regulations.
  • - Reduce investors' doubts by providing security guarantees for their personal data
  • - Simplify the account recovery process when users lose access
  • - Identity verification in the KYC program can help stabilize the crypto market. This kind of market is considered notoriously volatile; hence, the existence of KYC can also boost the market value.

From the explanation above, KYC benefits not only the government or crypto exchange platforms but also customers. Verifying user identities with the KYC program can build customer faith and transparency.  


Cons of using KYC in crypto


However, everything in this world must come with two flanks. Although the KYC law provides many benefits, some may see that its presence has drawbacks, such as:

  • - KYC enforcement can be an extra hurdle limiting access to the Web3 space or cryptocurrency market.
  • - The KYC procedure makes investors diminish their interest in this type of digital asset regarding the safety of their personal data.


Can I Buy Crypto Without KYC?


Buy Crypto Without KYC

Although KYC compliance brings many good things, it cannot be denied that some people may argue against this approach. So, if you ask, can we buy crypto without a KYC check? The answer is still yes.

Those who prefer to stay incognito can select peer-to-peer crypto exchange services or take advantage of Bitcoin ATMs, which usually do not always have to go through the KYC process. Peer-to-peer platforms enable crypto trades between private actors without revealing identity.

To avoid KYC requirements, some crypto exchanges even choose to domicile in softer regulatory environments. Blockchain analysis firm CipherTrace conveyed that as many as half of the exchange services registered in Seychelles show inadequate KYC procedures. Regardless, always keep in mind that regulations or laws are never perpetual. Just because a crypto exchange can be accessed without a KYC assessment does not mean the firm rule will stay like that forever. 

Due to the government regulations trying to ensure the security of crypto trading, more and more exchanges are currently being cracked down because of the poor KYC approach. On the other hand, Binance's CEO Changpeng Zhao said to Bloomberg that

improving his company's KYC robustness only cost him 3 percent of users

That conveys that full KYC compliance has only a minimal impact on his business. According to Zhao, people are currently more comfortable with licensed exchanges too. Ergo, it would be good to start learning to live with KYC. 

That's it. Hopefully, our review can make you get the point of "What is KYC crypto?" or "What makes KYC policy so important in cryptocurrency exchanges?". 

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