What is the meaning of KYC?

The acronym stands for “Know Your Customer”. It refers to all the conditions needed to be met in order to prevent or avoid illicit activities through money or valuable assets. In addition, this is the official tool required by the justice departments. KYC complements the AML (Anti-Money-Laundering) and anti-terrorist financing.

What is the relationship between KYC standards and cryptocurrency?

Crypto-banks or exchanges are considered financial companies, not just applications. As it was mentioned before, they are obligated to follow the law's requirements. In this environment there are no bank accounts, but instead there is the use of wallets. They offer a means of payment that allow users to transfer monetary value in the form of cryptocurrency. Each wallet has an address, each address has an owner, and this means there is a person behind each account. If this wallet is a considered a “custodial one”*, the user must present the respective KYC documentation.

As a user, you will be asked for a government issued identification document, such as driver’s license or a passport; pictures of your face will be scanned as well. The KYC procedure allows users to unlock all the product’s features. For example: High withdrawal or investing amounts, crypto purchases with debit or credit cards, linking a bank account, amongst other features.

All services have several requirements. Institutions try to match the person’s name, passport, address, etc. to criminal records, existing information on databases, financial or employment history and much more. This is considered as a risk level indicator for specific customers.

*Custodial wallet: This is an application offered by a specific company to manage cryptocurrencies.

Which services do not require KYC?

People can choose if the service to use will be custodial or non-custodial. That’s why it is important to recognize the difference between them. As it was mentioned before, crypto-banks or exchanges are considered money service businesses, where these protocols must be complied with.

Examples: Binance, Crypto.com, Abra crypto, BlockFi.

Instead, most of the dApps* like NFT games, DEXs, P2P sale points or staking reward services don’t require any verification. The user must only connect their wallet to be able to enjoy its features.

Examples: Stake.fish, Metamask, Local Bitcoin, Uniswap, OpenSea.

*dApps: It’s the acronym for decentralized Applications. This is used for all blockchain-based developments, these are not managed by another entity, and its data and coding are public.

Drawbacks & advantages:

There are people who prefer the verification process and others who don’t. Governments appeal for regulation and control against illicit activities and the crypto community argues to protect the holder’s anonymity.

Advantages:

▪ Reduces risks associated with cybercriminals and scammers.

▪ Helps companies offering services to other clients.

▪ Minimizes money laundering practices.

▪ May restore client accounts (With your KYC data, users can ask for support if they have an issue with their profile).

Drawbacks:

▪ Nullifies anonymity and privacy.

▪ Client accounts could be frozen.

▪ It promotes centralization.

▪ Creates participation barriers.

To sum up, KYC procedures are proposed to avoid illicit and unfortunate events. This activity has a regulatory reason behind it but it is affecting the spirit of cryptocurrency’s privacy and decentralization due to the way it is applied. It is designed to stop criminals; however, criminals are overcoming these traps, especially big organizations. Hence, the main concern around KYC is that it can be working only as a way to control common people or ban countries. Certainly, without KYC, investors can withdraw, trade, auction, etc. their cryptocurrency assets without restrictions.

There are other decentralized procedures to verify persons, such as Zero-Knowledge-Proof, which is a blockchain-based technology that validates data without revealing the person’s ID.

Sources: www.swift.com, withpersona.com