Markets are born spontaneously, but over time they acquire their own structure, develop rules of the game and mechanisms to protect against fraud.
The cryptocurrency market is no exception, and the stage of its spontaneous formation gradually flows into the next one.
The leading crypto exchanges of the world are gradually tightening the requirements, and the further, the more sites insist on user verification.
Does this pose a threat to the decentralization of cryptocurrencies?
What is KYC?
KYC is an acronym for the English phrase "know your customer/client". This is the name of the mandatory verification of the client's personal data, usually by a bank or other financial institution. As part of this procedure, documents confirming the identity of the client, such as a valid identity card, are used. Additionally, the company may request other documents, such as an insurance number, a utility bill with a home address, etc.
Usually, you need to provide information for KYC directly during the registration process, as well as in case of a change in address, name or other data. If you do not meet the requirements and pass KYC, access to the features of the exchange will be severely limited or impossible.
On some exchanges, unverified users can trade, but cannot withdraw their funds, somewhere withdrawal is possible, but in small volumes and exclusively in cryptocurrency. An anonymous client most likely will not be able to buy TUSD or other digital coins from a bank card on the exchange, since special attention is paid to crypto-fiat transactions
What does the standard KYC procedure look like?
The procedure itself may differ in details, but its essence is unchanged. It involves the collection and verification of customer data and consists of three parts:
- Customer Identification Program (CIP). As a rule, it is performed after registering an account.
- Customer Due Diligence (DD). If for some reason the company has considered someone a controversial client, a decision may be made to additionally check his background. The purpose of this stage is to assess the risk of further cooperation.
- Constant monitoring. Monitoring ensures the relevance of customer data and is conducted to identify suspicious transactions. For example, if a client is suspected of being terrorists, the exchange is obliged to conduct an investigation and the further fate of the account will be decided based on the results obtained.
Why most crypto exchanges require verification
KYC requirements are becoming mandatory on leading cryptocurrency exchanges. They ensure that work complies with regulations and laws. While there were few cryptocurrencies in circulation and they were not perceived as a kind of means of payment, KYC was not required on crypto exchanges.
But as the price of cryptocurrencies and interest in them rise, cryptocurrencies have become a potential tool for money laundering, terrorist financing and other illegal activities. The goal of KYC was to detect suspicious behavior at an early stage.
If someone uses the services of the exchange for criminal purposes, the exchange itself will suffer first of all, and the criminal will go unpunished. The reputational losses of the exchange will inevitably be reflected on all its users, who are not related to any fraud at all. KYC requirements are part of a larger anti-money laundering (AML) program.
KYC, AML, and other processes developed by regulators make organized crime's illegal activities more difficult. However, in the crypto community, KYC is treated ambiguously and they believe that this is contrary to the principles of anonymity and decentralization of cryptocurrencies.
Pros, cons, pitfalls
So, KYS is needed for mutual legal protection of both the exchange and the client. Verification provides maximum access to the functionality of the exchange. Verified clients are more secure in disputable and force majeure situations. These are quite obvious advantages.
At the same time, giving up anonymity is undesirable and unacceptable for many users. No exchange can give a 100% guarantee of personal data protection, and there have already been precedents for leaks.
And the notorious pitfall. The most vulnerable place in the transaction chain is the purchase of digital currency for fiat. Of course, the ability to buy QNT with ZAR using a bank card or electronic payment systems greatly simplifies life from a technical point of view. However, this is where the border between the anonymous world of cryptocurrencies and the controlled world of the traditional financial system lies.