Financial organisations employ a set of procedures known as Know Your Customer (KYC) to verify the identity of their clients. Know Your Customer (KYC) is the first step in the due diligence process for Anti-Money Laundering (AML), and it aids financial institutions in evaluating the potential risk that a client poses.
KYC is necessary for cryptocurrency exchanges to follow AML rules. Exchanges can aid in preventing illicit behaviour like money laundering and the financing of terrorism by conducting customer identity verification.
The term “money laundering” describes the practice of disguising the source of ill-gotten gains. On the other side, terrorism financing entails giving money to terrorist groups. The law prohibits these two actions as they potentially endanger international stability.
To prove their identity and follow Know Your Customer (KYC) rules, customers of exchange may need to provide further documents. Once an exchange confirms a customer’s identification, only then may they open an account and begin trading.
Can I Trade Crypto Without A KYC?
Despite the prevalence of KYC-required platforms, certain exchanges still don’t demand them due to the stringency of AML policies. Some crypto users, especially those who value their anonymity, persist in using non-KYC deals despite their risks.
Trading on a non-KYC exchange carries several potential risks, such as:
1. Liquidity: non-KYC exchanges typically have lesser liquidity than KYC exchanges since they are smaller and serve a smaller client base, making it difficult to locate buyers or sellers when you wish to trade, resulting in higher costs.
2. Security: non-KYC exchanges are frequently less secure than KYC exchanges due to lax AML processes, making them more open to cyberattacks, fraud, and other criminal behaviour.
3. Fees: non-KYC exchanges sometimes demand more significant fees than KYC exchanges to mitigate the risk of fraud and other illegal behaviour.
Steps Involved In The KYC Process
1. A crypto exchange demands personal information such as a user’s full name, address, date of birth, and proof of identity. The customer submits all the required personal information to the exchange.
2. The crypto exchange validates the customer’s identity using the submitted government-issued proof of identity, which could be a passport, utility bill, or state-issued driver’s license.
3. The exchange corroborates the customer’s identity from an official database containing the related information.
4. The exchange determines the customer’s risk profile which enables it to assess whether the customer has a propensity for high risk of money laundering or other related crimes.
5. When everything is in order, clients will be able to engage in specific activities on the crypto exchange.
Benefits Of Crypto Know Your Customer
1. Boosts Customer’s Trust
Users are likelier to stick with a service if they believe the crypto exchange is aggressive in protecting their accounts. Finally, verifying users’ identities is in the best interests of both consumers and companies.
2. Reputational Damage Control
KYC-compliant exchanges drive to prevent fraud and protect their reputations in the case of a hack or data leak. Businesses that use KYC can immediately freeze or terminate accounts that may be associated with illicit activities.
3. Reduced Legal Risks
Businesses can limit the risk of legal issues or regulatory fines by undertaking KYC due diligence. Strong KYC processes enable crypto exchanges to stay ahead of the curve as regulatory requirements shift.
Instead of striving to comply with new regulations, companies may concentrate on boosting conversion rates, streamlining transactions, and ensuring compliance as international norms evolve.
4. Increased Market Stability
Due to the use of pseudonymous transactions, the cryptocurrency market may be very volatile and unpredictable. KYC systems incorporating increased identification verification maintain the market’s overall stability and boost investor trust.
Importance Of KYC To Crypto Exchanges
Because governments or central banks do not regulate Bitcoin and other blockchain-based cryptocurrencies, users may spend money fast and securely with minimum costs. As a result, transactions between people are often quick and anonymous, taking place on the blockchains of the underlying currencies.
Cryptocurrency’s very nature, especially its speed and anonymity, makes it an appealing choice for criminals seeking to bypass traditional AML rules. Criminals must discover a technique to convert “dirty” money into cryptocurrencies and cash out when they are through with laundering money. As a result, crypto exchanges are great locations for thieves to launder money.
KYC compliance is critical for crypto exchanges. It not only increases investor trust but also minimises the danger of money laundering.
Are There Crypto Exchanges Without KYC?
Some argue that requiring KYC violates the decentralised nature of cryptocurrencies. They say users should not divulge their personal information or documents during trades. Many people think it is critical to keep their knowledge hidden from authorities, especially in nations with harsh governments.
There are further reasons why some people may choose to avoid KYC. For instance, if a person owes money to creditors, giving their personal information to a crypto exchange increases the likelihood that the creditors would take their assets.
Creditors will lose money without this knowledge, and asset seizure becomes less of a danger. Finally, some people respect their privacy and refuse to share it. Some of these non-KYC exchanges include Uniswap V3 and PancakeSwap.
Can I Buy Crypto Without Know Your Customer?
Yes, you can buy cryptocurrency without providing KYC. You can achieve this by trading on peer-to-peer crypto exchanges. You may also buy cryptocurrency with cash using an automated teller machine (ATM). Bitcoin ATMs are similar to traditional ATMs. However, they only accept cryptocurrency transactions.
Finally, instead of going via a traditional exchange, you may utilise a site like ShapeShift or Changelly to convert one cryptocurrency into another. Because they do not demand personal information from users, these services are often called decentralised exchanges.
Changelly, for instance, offers both non-KYC and KYC solutions. For example, users who want to transact higher sums must complete the KYC procedure.
Is Know Your Customer Safe In Cryptocurrency?
KYC moves to prevent financial crimes such as money laundering and terrorism financing. Exchanges may make their platforms safe by asking users to provide personal information. However, there are several limitations to the KYC procedure.
Users, for instance, may find it time-consuming and frustrating. Furthermore, there is always the possibility that hackers would steal user data from exchanges.
While it is possible to trade cryptocurrency without KYC, it is not always advisable. It is critical to take extra precautions to secure one’s identity and personal information while utilising an exchange that does not need KYC.