Crypto Guide: Understanding the Importance of KYC in Cryptocurrency Exchanges
As an influential and growing technology, crypto and the blockchains are the subject of many myths. Perhaps you have heard a popular myth that cryptocurrencies are largely anonymous. Many individuals believe that they can send and receive cryptos without sharing personal and banking information. While it's true that most of these details are not required, the major cryptocurrencies and exchanges never truly allow users to conceal their identities.
Binance, the world's biggest cryptocurrency exchange, has announced its latest policies on customers' data, and the need to pass the standard Know Your Customer or KYC procedure, to open and use their accounts. Reflecting from its recent tussles with regulators, Binance has announced that it is tightening its customer check and verifications.
According to various news reports, new Binance customers are now required to submit a government-issued ID and pass its facial verification process to unlock "Intermediate" verification. Once approved, the user can now access Binance services such as deposits, trades, and withdrawals. For existing customers that have complied with the "Basic" verification standard, their access to the operator's services is limited to activities such as withdrawal, order cancellation, position close, and redemption.
Binance's recent policy change tell us that crypto and the blockchains can never go fully anonymous. With regulatory checks and increasing concerns on money laundering, identify theft, fraud, scams, and other financial crimes, many stakeholders in the crypto industry are recalibrating their data privacy policies, at the expense of the initially anonymity.
A perfect illustration of this is the recent moves of cryptocurrency exchanges like Binance to reintroduce and reinforce the Know Your Customer (KYC) process. The KYC is a customer verification process which aims to protect users and prevent scams and other financial crimes like money laundering. But is the KYC actually a good thing in the crypto industry?
In this brief guide on crypto and the KYC, we'll explore the pros and cons of the protocol, and help you understand why it's a necessary step when using crypto services.
KYC, the blockchain and the cryptocurrency industry
In the financial and cryptocurrency industry, the KYC is synonymous with customer identification. For example, before a customer can use an e-wallet to send and receive money, he needs to submit scanned copies of government IDs and complete a facial scan, in addition to the basic information. In short, the KYC protocol is a set of standards designed to protect financial institutions against fraud, money laundering, corruption, and even terrorist financing. Traditionally, a KYC process often involves three steps:
- Establish the person's identity;
- Understand and qualify that the source of funds is legitimate; and
- Assess the risk of money laundering.
In cryptocurrency exchanges, operators need to verify the customers' identity and review the sources of income. The KYC measures in these platforms often involve the following:
- Submission of personal data such as name, complete address, and updated mobile number;
- Uploading of scanned government IDs such as driver's license and passport;
- Presenting a proof of billing, such as a bank statement, utility bill, or other similar documents;
- Completion of biometric verification, with the applicant taking a selfie or a short video to establish identification.
Cryptocurrency exchanges use these steps to ensure that the submitted information is correct and updated. Additionally, these exchanges may also perform further checks to ask for additional information, to screen users, for risk assessment, and as part of ongoing monitoring to flag suspicious activities.
The importance of KYC in crypto industry
The KYC protocol in the financial and cryptocurrency sectors may seem like an additional burden, but it serves plenty of purposes. Firstly, a KYC process help organize information and ensure correct reporting and tracking. Customers can expect seamless and stress-free transactions because information is correct and updated.
Secondly, implementing this protocol promotes safety and accountability. Everyone will feel more confident completing your transactions, knowing that there are "no bad actors". In cryptos with no clear KYC practices, users are more exposed to potential scams and fraud since there's no process to screen out users with questionable backgrounds.
Ultimately, a KYC process helps in identifying and addressing illegal activities. Many countries today require the KYC process as part of global efforts to curb anti-money laundering (AML) and counter-terrorism financing (CTF) measures.
What are the pros and cons of KYC in the crypto industry?
The KYC process has always been controversial, with stakeholders holding different opinions and levels of acceptance. One aspect of debate centers on the tradition of anonymity in crypto. There's a long-held myth that crypto transactions are private and anonymous, and there's no need to share personal and banking information. Let's take a closer look at its pros and cons, and understand why it remains a hot topic:
Pros
Most crypto exchanges and users comply and support the KYC process due to the:
- Improved safety and security of transactions, as identity theft and other financial scams are made more difficult;
- Reduced risk of criminal activities like identity theft, fraud, and money laundering;
- Compliance with regulations, as crypto exchanges gain legal protection which legitimizes the business;
- Promote trust and credibility for crypto exchanges, making these platforms more attractive to use.
Cons
There are also a few reasons why many exchanges and users have negative opinions on the KYC policy, pointing to the following concerns:
- Potential breach in data and privacy, since crypto exchanges collect the customers' personal and financial information;
- Centralized entities and organizations control user data, which runs against the principle of decentralization that the crypto industry is known for;
- Highly inconvenient and unnecessary barriers for users who don't have ready access to government IDs and other documents;
- Costly implementation and monitoring of the KCY process, which can lead to higher fees for users.
The KYC process is now an institutionalized requirement not just in crypto, but in the financial industry. Banks and financial institutions require its new customers to submit documents and scanned IDs to establish their identities. Companies that offer e-wallets require customers to upload scanned copies of government-issued IDs. And today, an increasing number of cryptocurrency exchanges implement strict KYC protocols to protect its customers, for compliance, and as a response to heightened regulatory checks and inquiries.
So, is the KYC protocol an important program? Does it benefit crypto exchanges, its users, and the industry in general?
Yes, running a KYC check is helpful as it promotes a safer environment for everyone. And since privacy and anonymity remain integral characteristics of the crypto industry, the challenge for all stakeholders involved is to develop the right KYC implementation, one that strikes the proper balance between safety and security, and user privacy.
