The Know Your Customer (KYC) is a standard procedure that businesses and agencies use to confirm the identity of their customers. This process is mandatory for banks, credit, and debit card companies – basically in all the components of a traditional financial system.
KYC on cryptocurrency projects could be a very controversial topic. In essence, the protocol denounces the concept of cryptocurrencies and the blockchain, which are pseudonymous. However, not having the protocol in place exposes your project to dire circumstances, such as Money laundering, hiding beneficiaries, and unaccounted losses.
Therefore, as much as KYC is a shaky topic for crypto project developers, it could be advantageous to your project. Read on to find out what you stand to gain with KYC.
What are the Benefits of KYC in Crypto?
Despite the various operational changes that come with implementing the Know Your Customer (KYC) regulations, exchanges, among other players in the industry, are still expected to gain substantial benefits from the process. Some of these are;
Money Laundering and Other Scams are Reduced
According to Forbes, there were more than 80,000 cases of cryptocurrency fraud in the US last year. It is a significant increase of up to 24,000% from 2016. With a robust identity verification system, investors can reduce the risk of fraud and boost their market reputation.
Enhanced Customer Trust and Transparency
A strong and transparent identity is crucial for customers to feel they are receiving the best possible service. It can also help build trust and increase the likelihood that they will continue using your service.
A More Stable Crypto Market
Due to the nature of the cryptocurrency market, it is very volatile. People must have the necessary identity verification to participate in its operations. It can help stabilize the market and boost its value.
Enhanced Legal Protection
A robust Know Your Customer (KYC) policy can help companies avoid costly penalties and improve conversion rates. It can also help them comply with evolving international regulations. Companies can focus on improving their efficiency and reducing legal exposure by implementing a comprehensive approach to managing risk.
KYC Effect on Decentralization and Anonymity
One of the main advantages of blockchain technology is its ability to allow people to have more control over the system. It eliminates the possibility of having a single authority over it.
Instead of a single database, all transactions on blockchains are stored on various computers worldwide. It allows them to operate as decentralized financial institutions. Because of this, the requirements for Know Your Customer (KYC) are similar to those for traditional financial institutions.
Due to the nature of blockchain technology, users are often concerned about losing their anonymity. Doing so would be a high price for them to submit their details to a central exchange.
Despite the assurances that cryptocurrencies are designed to treat their users’ private information with dignity, many people still don’t want to provide their details to a central exchange. Many don’t have the necessary systems to protect their customers’ privacy.
There have been reports of hackers gaining access to the details of cryptocurrency users by exploiting the loopholes in the exchanges’ software. One of the most prominent exchanges with dedicated systems for collecting and managing this type of data is Binance.
Why is KYC Mandatory for Most Crypto Exchanges?
Due to the regulations, all crypto exchanges must carry out Know Your Customer (KYC) checks. These are essentially money service businesses that the federal government regulates.
While these businesses have always been able to handle money in a certain way, initial skepticism has led to the lack of rules around exchanges. Due to the increasing number of people trading digital currencies, the market for crypto exchanges has become more mainstream. It has prompted the government to impose more stringent regulations on these operations.
In December 2020, the Treasury Department proposed a rule requiring users to transfer money from a central exchange to a personal one to provide the wallet owner with their personal information. This new rule would affect transactions worth over $3,000.
If a transaction involving more than $10,000 takes place within a day, the exchange must collect and send information about the transaction details to the FinCEN. Although the proposed rule may not pass, it’s believed that the government will eventually approve a version of this regulation.
Well, Do You Know Your Customer?
Although the Know Your Customer (KYC) requirement for traditional financial services is unlikely to change, there is still a debate about what should and should not be done in cryptocurrency. In June 2019, the Task Force on Combating Terrorist Financing updated its guidelines. These guidelines require countries to monitor and prevent the financing of terrorism through the use of crypto-assets.
It is argued that it will be challenging to establish and implement regulations related to the use of cryptocurrencies due to the situation’s complexity. Another issue is that it is not always possible to determine the identity of the beneficiaries in cases of malicious activity.