Importance of KYC Verification for Crypto Exchanges
Crypto Basics

Importance of KYC Verification for Crypto Exchanges

Created 1yr ago, last updated 1yr ago

Almost all centralized crypto exchanges have implemented KYC measures to improve their platforms' security. But how does it help crypto as a whole?

Importance of KYC Verification for Crypto Exchanges

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Cryptocurrencies have seen unprecedented growth over the last few years as an emerging asset class. However, due to the anonymity that comes with the technology, they may be used to carry out all sorts of illicit activities ranging from money laundering to cyber crimes and terror financing.
According to researchers from Chainalysis, a leading blockchain analytics company, funds worth $1.3 billion were laundered in 2020, and since then, the criminal use of cryptocurrencies has only grown.
To combat this growing issue, global regulators are finding ways to ensure proper measures to minimize the illicit use of cryptocurrencies. KYC is one such measure introduced globally by centralized exchanges (CEXs).

What Is KYC?

KYC, which stands for "Know Your Customer" or "Know Your Client," is a set of necessary actions ensuring that financial institutions' customers are real human beings and not a part of any illegal corruption schemes. If the client fails to comply or provide the necessary documents, the institution has the right to close the client's account or offer limited services.
Organizations are increasingly implementing KYC practices as their first line of defense to comply with the strict Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations.

What Is KYC in Crypto?

Since cryptocurrency exchanges and wallets are now considered "financial institutions," it is necessary for them to integrate KYC regulations. Aligning with Satoshi's vision of a decentralized and anonymous currency, centralized exchanges initially intended to allow their customers to remain anonymous. However, with the growing need for regulations felt by many market participants, exchanges now have to ensure due diligence of their client's identity. In order to achieve this, exchanges have introduced the following methods of security implementation:

ID Verification: Exchanges have to establish the identity of their customers through verification. This screening also helps them to screen their customers to ensure they are not subject to international sanctions.
Customer Monitoring: Exchanges have to develop an understanding of their customer's financial activities. To achieve this, they monitor transactions on an ongoing basis, especially paying close attention to those sharing similar characteristics with criminal activities.
AML Screening: Assess money laundering risks associated with their customers' activity.
Binance, the world's largest crypto exchange in terms of trading volume, introduced KYC measures in 2021, asking new and existing users to provide their government-issued IDs and pass facial recognition. Although all big centralized exchanges now implement KYC measurements, crypto ATMs and decentralized exchanges (DEXs) do not require KYC measures. Therefore, investors can still purchase cryptocurrencies without going through the KYC process on a centralized exchange.

Benefits of KYC in Crypto

Despite exchanges going through operational hurdles connected with implementing KYC standards, there are multiple ways exchanges and regulatory authorities benefit from it. These benefits include:

Operational Accessibility: With the help of KYC regulations, exchanges find it easier to operate in a new country, as acquiring an operational license becomes much more accessible due to compliance with laws.
Lower money laundering and other risks: Due to a vigorous ID verification process, the chances of the exchange being used to conduct illicit activities decrease.
Lower legal hurdles: While ensuring that their platform is not used for criminal purposes with the help of KYC measures, exchanges can focus on growth and investment instead of getting crippled by legal hurdles.

With KYC measures in place, cryptocurrencies have a higher chance of mass adoption and operating side-by-side with traditional fiat, allowing merchants globally to accept them.

Conclusion: Is KYC Beneficial for Crypto?

Although lacking anonymity, through KYC, authorities and centralized exchanges can ensure crypto can co-exist with modern finance. It helps to ensure that crypto is not used for criminal purposes, but for investment and financial uses only.

Without KYC, there's a chance crypto might become a safe haven for criminals. Hence, the introduction of KYC provides investors with a safer environment to invest their money.

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