KYC standards were introduced to protect against fraud, money laundering, corruption and the financing of terrorist organizations. This is because financial institutions in some jurisdictions are required to “know your customer”, which means they must request proof of a person’s identity as part of the account creation process.
By performing KYC processes, an organization manages its risk of becoming involved in criminal activity. The visibility provided by KYC enables institutions to have visibility into illicit money flows and refuse to serve terrorist organizations. Faced with the success of cryptocurrency, we are justified in wondering if KYC could ruin everything; here are the details of these possible hostilities.
Cryptos facing KYC procedures
The original purpose of blockchain and crypto is to provide an alternative to traditional, centralized financial systems. Cryptocurrencies operate on a decentralized financial system that would avoid the risks associated with banks making risky financial decisions. Cryptocurrency exchanges and similar organizations perform many of the same roles as traditional financial institutions. Therefore, they are subject to the same rules and requirements where such rules exist.
More than a dozen countries have KYC regulations designed to protect against fraudulent and illegal financial activity. Cryptocurrency exchanges and other organizations located in these countries or providing services to their citizens are also subject to these KYC regulations. Blockchain technology is designed to be pseudonymous, and KYC provides most of the visibility used to identify the perpetrators of attacks and other illegal activities on the blockchain. If this system becomes effective, we may fear dark times…
The possibility of a decentralized verification process
KYC measures are suitable for the classic financial universe, but it is possible that a process will be created for cryptocurrencies. It is possible that in order to comply with KYC measures, cryptocurrency exchanges:
- Collect personally identifiable information (PII) from their customers, including full name, location, date of birth and address
- Compare this information with their official government-issued ID, such as a passport or state-issued driver’s license, and proof of address, such as a utility bill
- Verify the client’s identity against official databases containing information on Politically Exposed Persons (PEPs) and Sanctioned Persons.
These steps help financial institutions determine the risk of money laundering and financial crime involving virtual currencies for each customer. If everything is verified, the client is allowed to participate in certain activities on the cryptocurrency exchange.
KYC measures could compromise the theoretical anonymity of blockchain and crypto by facing the real limitations and constraints of laws and regulations. In addition, KYC provides some level of visibility to blockchain actors, but this visibility is imperfect and can be avoided by criminal actors. At the moment, it is too early to comment on KYC and its possible actions on the crypto.
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