KYC/AML in crypto: are they needed?

Our civilization is built on trust in each other. But people who abuse it have been, are, and always will be. In an ideal world of crystal-clearly honest and well-known people, there would be no need for a state with all its attributes such as documents, courts, police, tax authorities and many other regulatory bodies.

But our world is not perfect and there are a lot of us in it. We live in large groups, but apart, as perhaps never before. Not everyone knows their neighbors even by sight. Is it possible to trust a person without knowing absolutely nothing about him? But still we have to do it at every step. We trust the builders who built our homes, the manufacturers of household appliances, food, clothing, and so on ad infinitum. And if something goes wrong, we can go to court.

However, the ability to protect any rights always implies the disclosure of personal data to public authorities. In the crypto world, this is not necessary, the blockchain is positioned as an anonymous environment. However, the reverse side of anonymity does not look so attractive. For example, instead of exchanging BUSD to USDT on a well-known platform, you will suddenly accept a very attractive offer from some very new exchanger and end up with nothing. In this case, it will be almost impossible to prove the fact of fraud and return the money to the injured party.

KYC verification as a security condition

While the crypto community was limited to a handful of enthusiasts who do something incomprehensible and dream of revolutionizing the field of finance, cryptocurrencies could be and were more anonymous. Digital money did not attract much attention from government agencies, but exactly until they began to actively evolve towards a real alternative means of payment.

At that moment, it became clear that the complete anonymity of users gives almost unlimited room for maneuver for various dark personalities. No one began to reinvent the wheel, in order to combat fraud and money laundering, crypto exchanges began to introduce KYC verification, which is well known to everyone from the experience of communicating with banks and other financial organizations.

What is KYC verification and what are its advantages?

The abbreviation KYC comes from the expression “Know Your Customer”. This is a confirmation of the user’s identity by requesting his personal data.

The requirements for completing the procedure, the verification period, and the benefits for verified clients vary greatly from exchange to exchange. For example, some platforms are quite loyal to anonymous clients, while on others, the maximum possibilities are limited to viewing ETN price and analyzing the price chart of available cryptocurrency pairs.

 Of course, not all users are ready to provide information about themselves, fearing a possible data leakage. However, the requirement of KYC verification is one of the indicators of the reliability of the exchange. If no data is required from you, the platform definitely does not bear any responsibility to you.

So, after verification is completed, the exchange receives information about the client, his financial situation and risk profile. In exchange for this, the platform provides the user with enhanced account protection and an additional set of features that are not available to anonymous users, for example, these can be:

• Access to all types of crypto-fiat transactions.
• Increasing the deposit/withdrawal limit.
• Reducing commissions.
• Possibility of account recovery in case of password loss.

The main disadvantage for the client is the loss of anonymity. There are significantly more disadvantages for the exchange, since well-trained specialists, additional software and equipment will be required to correctly verify the data and ensure their security.

What is the difference between KYC and AML?

KYC is only part of a comprehensive anti-money laundering (AML) program, the process of verifying and monitoring a client’s personal data. In addition to KYC, AML includes software filtering, documentation accounting and other regulatory processes that are aimed at combating financial crime.

All these processes are aimed at preventing the legalization of proceeds from crime. So they complicate the illegal activities of terrorists and organized crime groups.

Yet many members of the crypto community do not share this point of view and are not enthusiastic about KYC verification. Their main argument against is the contradiction of this procedure with the concept of cryptocurrency decentralization.

How does KYC affect decentralization and anonymity?

Blockchain is decentralized, transactions are stored on many computers around the world and no single organization can fully control the system. Compliance with KYC requirements somehow involves the transfer of data to a central authority.

Accordingly, for cryptocurrency supporters, the loss of anonymity is a very high price. Although crypto exchanges promise respect for data, no centralized platform can guarantee 100% protection against hacker attacks.