How well do we know each other? — that is Know Your Customer
As part of their anti-money laundering and combating the financing of terrorism and financial crime activities, financial service providers are required to verify their customers. This process is called KYC or Know Your Customer. This is a common requirement for any financial service provider and customers have become accustomed to this kind of protection in old and centralized finance. However, the cryptocurrency industry implements KYC procedures to increase trust and properly manage risk. However, the question remains whether rigorous authentication procedures do not strike at anonymity and the idea of decentralization?
Service providers usually collect customer data at the time of onboarding before they make their trades. With incomplete details, some platforms provide an account but restrict trading until the KYC is complete. First of all, the client’s identity, date of birth and tax residence are verified. Then a cross-check takes place. It is also common practice to ask the customer to send a selfie and handwriting sample. Sometimes financial service providers need to re-verify at regular intervals. KYC laws may vary from country to country.
The pseudonymous nature of cryptocurrencies makes it extremely easy to find a loophole for tax evasion or money laundering. There are three reasons why KYC is essential in the crypto industry:
First, blockchain transactions are irreversible. Decentralization means that there is no administrator who would ensure that transactions are carried out correctly. Therefore, once a transaction has been made, it cannot be rolled back.
Secondly, you do not need any personal information to set up a cryptocurrency wallet. So you can’t be sure who you’re sending funds to.
Third, in many countries, cryptocurrencies are not regulated in any way.
One thing is certain, the introduction of KYC significantly improves financial security and helps fight crime. It also prevents identity theft. It increases trust and builds a better reputation for the entire industry. Interestingly, new individual and institutional investors expect the market to be regulated. The former are not attached to their anonymity on the web, but they are used to regulation. The latter wonder if placing funds in an unregulated market is a good move.
Doesn’t this then contradict the idea of decentralization and freedom from intermediaries? However, cryptocurrencies are more than just bypassing asset brokers. Each cryptocurrency has its usefulness and its origin. Now it is essential that the maturing crypto community on its way to a good reputation finds a technical solution that will be both decentralized and secure customer privacy. On the other hand, regulators should open up to new technical possibilities and awaken the desire to expand their knowledge in the field of blockchain.
In traditional banking, it is quite acceptable for the lender to check the customer’s credit status, political stance, or clean credit history. An investment service provider may also require accreditation to verify investor status.
Arguments against the use of KYC cannot be omitted in this situation.
Let’s start with the discrepancies that result from different standards of electronic data exchange and their interpretation. This leads to inconsistencies and increased costs.
The cryptocurrency industry is ambitious and there are ideas to combine it with the traditional financial system and this will attract institutional investors.
KYC control at any financial service provider will always involve an additional cost that will be borne by the customer
Another obstacle in implementing KYC procedures are the relevant documents. Some documents do not contain data that is necessary to validate the legality of customer data. Or customers do not have the required documents. This makes customers have limited access to financial services.
There remains the issue of security of data stored on the platform itself. The lack of adequate protection against hackers makes sensitive data left by customers on the platform unsafe.
The cryptocurrency industry is constantly working on the best solution for verifying customer data. Among the ideas for a more private KYC execution, there are: a digital signature, a zero-knowledge protocol for authenticating verification processes without signatures and documents, and even the program works on-chain Quadrata ensuring pseudonymity in the chain.
Let the summary word be that the crypto industry is changing and adapting to the regulations. In such a situation, it would be worthwhile for traditional methods to be improved and regulators to be ready to broaden their knowledge and accept new technologies.
