Could KYC Break Cryptocurrencies?

KYC standards have been put in place to protect against fraud, money laundering, corruption and financing of terrorist organizations. This is because financial institutions in some jurisdictions are required to “know your customer”, which means they must request proof of a person’s identity as part of the account creation process.

By running KYC processes, an organization manages the risk of being involved in criminal activity. The visibility provided by KYC allows institutions to have visibility into illegal money flows and to refuse to serve terrorist organizations. Faced with the success of cryptocurrency, we have the right to ask ourselves if KYC could destroy everything; here are the details of these possible hostilities.

Cryptocurrencies face KYC procedures

The original purpose of blockchain and cryptocurrency is to provide an alternative to traditional centralized financial systems. Cryptocurrencies operate on a decentralized financial system that would evade the risks associated with banks making risky financial decisions. Cryptocurrency exchanges and similar organizations play 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 regulations designed to protect against fraudulent and illegal financial activities. Cryptocurrency exchanges and other organizations based in these countries or providing services to their citizens are also subject to these KYC regulations. Blockchain technology is designed to be pseudonymous and KYC provides most of the visibility used to identify attackers and other illegal activities on the blockchain. If this system becomes effective, we can fear dark times …

The possibility of a decentralized verification process

KYC measures are suitable for the classic financial universe, but a process may be created for cryptocurrencies. It is possible that in order to comply with the KYC measures, cryptocurrency exchanges:

  • Collect personally identifiable information (PII) from their customers, including full name, place, date of birth and address
  • Compare this information to 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 client’s identity against official databases that contain information on politically exposed persons (PEPs) and sanctioned persons.

These steps help financial institutions determine the risk of money laundering and financial crime involving virtual currencies for each customer. If everything is verified, the client can engage in certain activities on the cryptocurrency exchange.

KYC measures could undermine the theoretical anonymity of blockchains and cryptocurrencies by meeting the real-world limitations and restrictions of laws and regulations. Furthermore, KYC provides a certain level of visibility on blockchain actors, but this visibility is imperfect and can be circumvented by criminal actors. At the moment it is too early to comment on KYC and its possible actions on crypto.


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