By CTO and co-founder of the decentralized cryptocurrency exchange Streamity.org Dmitry Martyanov
More and more services are implementing KYC services (Know Your Customer) nowadays. That is to say, all users, before carrying out any operations with coins, must provide the service with personal data. Most often, it’s a scan of a passport or a photo of a bank card. It is clear why services are implementing it: to prevent money laundering (Anti Money Laundering, AML). But can you trust crypto-exchangers without KYC? How legal is this activity?
Why does one need KYC and what is the bonus to the user?
Crypto services implement KYC in order to not get under the close attention of regulators. As the example of the BTC-e exchange proved in the summer of 2017, the exchange may close overnight due to AML violations (moreover, Vinnik, the alleged BTC-e CEO, was extradited to the US and arrested by the authorities). One of the motives for the accusation was the failure of crypto exchanges to comply with KYC/AML standards. Millions of BTC-e users could not withdraw money from the exchange, and so there was panic. After a while, user balances were restored on the WEX.nz domain, and it was even replenished with bonus tokens. However, the nerves of those who kept millions in their accounts on the exchange are unlikely to be restored.
Therefore, the presence of KYC can at least guarantee users that government bodies will not be able to immediately close access to the service, and that its activity is still technically legal.
Another point of view
On the other hand, the KYC procedure itself is rather tedious. Some crypto exchanges require a picture of a user’s bank card against the backdrop of their website at the current time in order to verify the account. All of this is not very convenient. In addition, many people do not trust any Internet services to not share their personal data.
Another argument against KYC is that the activity of crypto platforms is not regulated in several countries. That is, they are neither legal nor illegal. Therefore, many believe that crypto sites, unlike casino Trump Taj Mahal, for example, will not be fined or closed.
In addition, the users tend to think that the reliability of the cryptosystem depends on two-factor authentication, for example. Also, many traders prefer not to keep funds on the balance of the exchange, but to immediately withdraw them to their cold wallets. All of these measures protect user money without KYC.
Additionally, if the exchange is truly decentralized, the blockchain can eliminate the need to implement KYC practices. In the blockchain you can store the data of all the clients within the service in an encrypted form. Plus, blockchain registries can help to avoid data duplication, which so often occurs with KYC. The blockchain can also automate many actions so that users do not have to enter information manually. However, only a few modern cryptosystems are actually decentralized and managed by distributed servers. Therefore, the real protection of user data on the blockchain is still a utopian idea.
Is it worthwhile to still trust services without KYC?
Of course, this issue remains under consideration for each individual user. But to use sites without KYC – that is an additional risk. Moreover, in the case of crypto exchanges, the absence of KYC can lead to the emergence of a large number of “bad traders,” those who manipulate the price. For example, there is a practice known as “spoofing” that allows a trader to place, buy, or sell orders above or below the market value in the hope of manipulating the price of the currency in any direction. This maneuver is illegal and leads to excessive and unnecessary volatility. Hardly anyone will like the exchange with a large number of pampers and dumpers that constantly affect the prices (on social networks there are many groups like “Pump and dump,” where traders agree to buy or sell a cryptocurrency at a certain price in order to influence the market).
When trusting your money to services with KYC, one protects himself from at least a small amount of the pitfalls that exist within the crypto industry.