What is KYC in crypto?
KYC or “know your customer”, is a method used by financial institutions and businesses to verify the identity of their clients or customers. KYC in crypto basically involve what security check platforms carry out in order to confirm the identity of the person that wants to participate in the platform. It could be an ID, a photo, addresses, social security number etc. depending on the platform requiring it. Crypto exchanges are required to collect this information from customers so that illegal activities or scams can be managed or prevented completely.
Cryptocurrency exchanges implement KYC in order to:
- Confirm or verify their customer’s personal information.
- Acquire a better understanding of the activities of their potential customers and confirm their loyalty.
- Also, to determine the possibility of the risk’s customers pose.
KYC is the first stage of anti-money laundering (AML) due diligence. Financial institutions make use of KYC to evaluate customer’s risk profile based on their tendency for financial crimes. Cryptocurrency exchanges, wallets and other service providers also need KYC to conform with AML regulations. Through confirming the identities of their customers, crypto exchanges can aid in preventing criminal activities such as money laundering, financial terrorism, identity theft etc.
Users on the exchange platform may be asked to submit additional certification to verify their identities in order to comply with KYC regulations. When a user signs up on a cryptocurrency exchange or wallet that requires KYC, they are simply expected to provide private information such as their names, addresses, security numbers, some might even request for the user to take an instant photo. Some might also require the submission of a government-issued ID and bank statements. Once an exchange has concluded in verifying the customer or user’s identity, the fellow can then go ahead to set up an account, start trading, withdrawing and getting engaged in other advanced features.
Although, KYC is an important tool for preventing or handling fraud and money laundering, it can also be considered problematic or controversial to customers in the crypto world who value their privacy given the somewhat unpredictable nature of the platform. Users like this may be hesitant to provide personal information to centralized authorities.
Can you trade crypto without a KYC?
Some decentralized exchanges and wallets exist that do not necessarily require KYC verification, although they may have lower trading volumes and fewer features if compared to the centralized counterparts due to strict AML regulations. The answer to above question is yes! As mentioned earlier, the issue of providing personal information could be controversial to some customers who are very particular about their privacy. While some exchanges have fully embraced KYC regulations, other exchanges have kicked against it, reason being that it undermines the very nature of crypto which is ‘anonymity’. These customers continue to seek out non-KYC exchanges despite its vulnerability to significant risks. A customer seeking for a non-KYC-required exchange should be aware that there are various risks and danger flags associated with it and they include:
- Reduced security: Due to lack of KYC verification, non-KYC exchanges are more vulnerable to hacking and other security breaches. Because of insufficient security the user’s fund and account may be at risk. Joined with a weak AML procedure, these exchanges are prone to have a high record of cyber-crimes, money laundering, fraud etc.
- Fees: Non-KYC exchanges frequently demand higher fees than KYC exchanges reason being that they have to set up parameters themselves to handle fraud and other cyber-crimes. So it is like the users paying extra fees to maintain security of their assets.
- Low liquidity: Non-KYC exchanges usually have lower liquidity than the exchanges that implement KYC verification. This is as a result of a smaller customer base which makes it difficult to find buyers or sellers whenever a user wants to trade, this in turn also results to users paying fees.
- Lack of regulatory compliance: Non-KYC exchanges are often unregulated or slackly regulated. This means that they do not have to obey the same legal and regulatory requirements as their KYC – Compliant counterpart. This omission also presents them as very susceptible to criminal activities, the absence of KYC verification also makes it tough to identify and track down fraudulent or malevolent actors, resolving disputes in this case may be difficult to manage.
You can choose to trade crypto without KYC but it’s generally not recommended given its security issues and more. However, if a user chooses to proceed with using an exchange that doesn’t require a KYC procedure, it is necessary to take extra measures to protect/guide one’s identity and private information.
How does KYC work?
Business and cryptocurrency exchanges require certain information from their customers to comply with AML regulations to access potential risks of illegal activities such as money laundering, fraud etc. It is usually required by regulatory authorities to prevent financial crimes. Here is an overall view of how the KYC process basically works:
- Customer information collection: Crypto exchanges require information from users, such as name, addresses, date of birth and identification documents such as passport or driver’s license. The user is expected to provide all these necessary personal information to the exchange.
- Identity verification: The exchange further confirms the user’s identity using the submitted government-issued identification tool to compare. They could also use electronic verification tools that compare the customer’s information with public records or government databases.
- The exchange validates the customer’s identity from official databases holding the relevant information.
- Risk assessment: The exchange also evaluates the risk level of the customer based on various factors such as the customer’s occupation, source of funds, country of origin and transaction history. By determining the customer’s risk profile, they get to asses if the customer poses a high risk of criminal activities.
- When the exchanges are done with the general overview valuation, and everything checks out, the customer is then permitted to partake in specific events on the cryptocurrency exchange. If he does not pass the verification check he may be denied entrance to the platform.
Benefits of crypto KYC
The crypto space has subsequent risks and malicious actors lurking around the corner right from its conception. These risks associated with cryptocurrency has forced legislators to step in and fill the monitoring void. Cryptocurrency exchanges benefit hugely from the regulatory compliance which is aimed at preventing money laundering, fraud and terrorist financing. The potential benefits of crypto KYC include:
- Reduced legal risks: By employing solid KYC processes, cryptocurrency exchanges get to stay ahead of the curve as legal requirements change. KYC methods enable changes to detect identity theft, prevent money laundering, and evaluate customer risk by demanding government-issued identification and identifying financial history and assets. By following these processes, exchanges get to reduce/monitor legal and regulatory risk, thereby creating an ample amount of time to focus on increasing conversion rates, accelerating transactions and guaranteeing compliance.
- Increased transparency and customer trust: Due to the customer verification procedures, users are assured of transparency and in return, their dependence or trust on that particular exchange increases. When users feel assured that their cryptocurrency exchange is taking practical and preventive measures to protect their accounts, they are more likely to continue using the service and even refer others to the platform which in turn causes the exchange to gain more customers based on the testimonials of the existing customer. Verifying user’s identities benefits both the users and the platform.
- Increased market stability: The cryptocurrency market as we know can be extremely unpredictable because of distrustful anonymous transactions that are often considered risky. KYC verification programs that contain improved identification verification aid in maintaining the market’s general stability, value growth and create assurance among investors.
- Reputational damage control: In cases where fraudulent or data breaches occur, exchanges that demonstrate total commitment to KYC procedures are in a better position to avoid fraud and protect their statuses. Exchanges that comply to KYC process can instantly take action to restrict or shut accounts that may be connected to criminal or illegal activities.
- Reduced risk of money laundering and scams: Given the thorough and dynamic identity verification KYC offers, its importance in crypto exchanges cannot be overemphasized. Fraudulent activities such as, cybercrimes, scams, money laundering etc. can significantly reduce and market reputation improved. Looking at the several cases of money laundering. Example, the loss of over $18.6 billion in crypto between January 1, 2021 and March 31, 2022, hence the importance of complying to KYC procedures will be valued.
Importance of KYC for crypto exchanges
KYC is an indispensable part of the anti-money laundering (AML) and counter-terrorism financing (CTF) measures adopted by financial institutions, including crypto exchanges. It is a vital part of the regulatory compliance and risk management framework of crypto exchanges. It aids in the protection of customers interests and the overall integrity of the system. Given the ever-growing cryptocurrency market, the pecks of KYC rules will be widely appreciated as it will not only expand for exchanges but also push increased regulatory enforcement.
Having mentioned its benefits above which also portrays its importance in crypto exchanges, we won’t be committing any offense if we further hit on its purpose. If one understands how blockchain-based cryptocurrencies and exchanges work, one will be able to discover that it’s the perfect space for money laundering given its nature of rapid transactions and anonymity. People in the black market or people involved in shady businesses might use this platform to convert their dirty money into cryptocurrency and then cash out when they are done, absolutely undetected!
However, with the KYC compliance, these types of events will bot go undetected. KYC in crypto exchanges makes it difficult for these criminal activities to progress, it reduces the risks of scams, financial terrorism and money laundering thereby building the confidence of genuine users and investors. Basically, the major importance of KYC in crypto exchanges is in its ability to avoid the illegal or unsolicited use of cryptocurrencies. It is an inevitable tool in securing the security of the users, investors, blockchain and crypto market at large. KYC in exchange platforms can help combat malicious activities, aid in reducing the probability of crypto attacks etc.
Are there any crypto exchanges without KYC?
Yes! A lot of people are of the view that imposing KYC verification goes against the decentralized basics of cryptocurrency. Many people value their privacy and argue that these exchanges should not request for personal information as it could put them in danger and also most users feel that their private information should not be disclosed to the authorities in the cases of tyrannical regimes.
As it concerns crypto exchanges and sharing of personal information, a lot of users do not trust handing their personal info to a third party, most investors feel that giving up so much information about themselves is putting them out in the open, vulnerable to be tracked down or targeted, some also wish to hide their earnings or money from loan sharks, employees, or their spouses. There are a lot of non-KYC exchanges in the crypto world that are reliable and secure. Some of the most popular ones include: PancakeSwap, UniSwap V3, dYdX Exchange, Bybit, MEXC, PrimeXBT, Paybis, ChangeNOW etc. Users should be aware that although these exchanges don’t require KYC, in the process of trying to withdraw their fund, they may be asked to provide some personal information. Reason being that most fiat-to-crypto exchanges will need to confirm the identity of the users in order to permit them to buy, sell or withdraw cryptocurrencies.
Can you buy crypto without KYC?
The answer is yes! There are numerous ways to buy crypto without having to go through a KYC verification process. It is possible for one to buy and trade crypto on peer-to-peer platforms like LocalBitcoins. You can also use crypto automated teller machines to buy crypto with a fiat currency using either a cash or debit card. Other platforms like DEXs, KUCoin, ShapeShift and Changelly can be used to convert one cryptocurrency to another without going through a KYC procedure although Changelly may require it if the user wants to transact larger amounts.
Do crypto wallets need KYC compliance?
It all depends on the type of wallet and the jurisdiction it operates in. Crypto wallets do not necessarily need to comply with KYC procedures. As reported on NOTABENE, crypto wallets fall into two categories: custodial and non-custodial wallets. Non-custodial wallets do not need to comply with KYC practices as the users are in total control of their funds unlike custodial wallets that hold the private keys to a customer’s wallet.
Nevertheless, crypto wallets allied with exchanges typically follow the same KYC principles as the exchange platforms themselves. Examples of non-custodial wallets that not require any personal information include: MetaMask, MyEtherWallet and TrustWallet. Furthermore, some hardware wallets like Ledger and Trezor don’t need KYC, they preserve user’s private keys offline thereby providing an additional layer of security.
Is KYC safe in crypto?
While KYC with its features provide an extra layer of security to the crypto space, its important to note that no system is utterly guaranteed (risk-free) and there might be some level of potential risks involved. It might be susceptible to hackers, can also be time-consuming and annoying with the several questions and processes. Generally, KYC is well-thought-out as safe in crypto, as it helps in preventing fraud, weed out malicious actors, prevent money laundering and other illegal activities. With KYC, users are assured that their accounts and funds are safe and that there is no risk of identity theft.
Regardless of this, it is pertinent to only provide your personal information to a trustworthy and reputable exchange platform that have a proven and popular track record of security maintenance. It is also advisable to use strong passwords and two-factor verification to further protect your account. It is generally considered as a necessary evil by the crypto community and although it has a few drawbacks, its importance and benefits supersede with several other features embedded in its future that could ultimately assure of an advanced security system in the crypto world.
