KYC standards were put in place 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 that they must request proof of an individual’s identity as part of the account creation process.
By executing KYC processes, an organization manages the risk of getting involved in criminal activity. The visibility that KYC provides enables institutions to gain insight into illicit financial flows and reject terrorist organizations. Faced with the success of cryptocurrency, we may wonder if KYC could destroy 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 circumvent 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 regulations and requirements where such regulations exist.
More than a dozen countries have KYC rules designed to protect against fraudulent and illegal financial activity. Cryptocurrency exchanges and other organizations based in these countries or providing services to their citizens are also subject to this KYC regulation. Blockchain technology is designed to be pseudonymous and KYC provides most of the visibility used to identify 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 appropriate for the classic financial universe, but it is possible that a process will be created for cryptocurrencies. To comply with KYC measures, cryptocurrency exchanges may:
- 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 customer’s identity against official databases that contain information on Politically Exposed Persons (PEPs) and sanctioned individuals.
These steps help financial institutions determine the risk of money laundering and financial crime with virtual currencies for each customer. Once everything is verified, the client will be allowed to perform certain activities on the cryptocurrency exchange.
KYC measures can jeopardize the theoretical anonymity of blockchain and crypto by counteracting the real limitations and limitations of laws and regulations. In addition, KYC provides some insight into blockchain actors, but this visibility is imperfect and can be evaded by criminal actors. At this point, it is too early to comment on KYC and its possible actions on the crypto.
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