Can Crypto and KYC Coexist?

KYC or know your customer  is a process that has been adopted by many businesses, especially financial institutions, that verifies the identity and suitability of the customer to that business. Since one of the main aims of KYC is to limit risk for the business and prevent intentional or unintentional criminal behavior by the customer, it must be great and applied across the board to all businesses, right? Cryptocurrency and blockchain are relatively new concepts, it is difficult to gauge the implications of KYC policies on the industry. 

Governments around the world are trying furiously to force crypto companies such as exchanges, wallets, mining pools, etc to adopt rigorous KYC policies. However, according to Cryptovest “over two-thirds of exchanges and wallets analyzed fail to conduct proper KYC checks on customers.” Moreover, many crypto wallets, exchanges and other similar services will feature a “no KYC” as a benefit to using their services. So, why is KYC viewed so negatively in the world of crypto? Privacy and anonymity in Crypto is totally defeated by KYC One key aspect of cryptocurrencies that users value is the idea of privacy and anonymity.

Cryptocurrencies are in theory, stored on decentralized blockchains, which are secured by miners who are indifferent to the actions and transactions users make, that are supposed to be P2P (peer to peer). Regular users of crypto are unlikely to have the full ledger downloaded and therefore will have to rely on a wallet to process their transactions, once this happens a third-party enters the equation and the transaction is no longer P2P. 

This is unless the crypto wallet is also indifferent to the transactions the user makes. This is why many users of crypto want to use a wallet that has no KYC because without KYC the wallet company is less likely to be intrusive of user’s transactions and identity. Without KYC, privacy, anonymity and the freedom to make transactions are relatively intact and uninfringed.  KYC means a single point of failure When a business has a KYC policy, usually this means you must submit a Proof of Identity (POI) and a Proof of Address (POA) document. 

For crypto, this means that the company that handles your digital currency also has access to your sensitive and private information. If you are talking about a regular financial institution, this would usually be okay, because if anything were to happen to your assets (such as hacking, theft), you are very likely to get them back in the form of reimbursement. However, crypto, more specifically blockchain, is immutable, which means that any transaction that happens cannot be reversed. 

This makes theft, whether it is by hacking or coercion especially damaging because whatever has been stolen cannot be reversed to return you your assets. Now ask yourself this, knowing that the transaction cannot be reversed, are you more or less likely to let a third party have possession of your sensitive information? Information that can, and has been stolen numerous times in the past to be used to leverage an unwanted transaction resulting in losses totaling in the billions. 

KYC means third-parties can limit your freedoms As mentioned above, governments around the world are trying very hard to levy KYC policies onto crypto companies. Though their intentions may be good, such as the prevention of fraudulent activities, criminal activities, and money laundering, does this mean the use of cryptocurrencies have to suffer? Another key aspect of crypto is that you can send money to anyone with relative ease and no restriction, there isn’t a banned list of public addresses you cannot send your crypto to. 

However, with KYC policies, the government can put massive pressure on crypto companies to curb your freedoms with regard to transactions and ownership. This could be as simple as preventing transactions to certain individuals or entities to something more serious and costly such as freezing your crypto assets. Cryptocurrencies were created to provide people with the freedom to do whatever they want with their own digital assets without an institution, entity or government being able to dictate what you can or cannot do with it. 

Crypto companies that have KYC, by definition, know who you are and therefore it becomes very easy for them to limit your freedoms on your own assets. People choose to have their assets in crypto for very specific reasons, some of those reasons have been mentioned above. Remaining anonymous online is becoming more and more difficult and retaining your privacy and freedom to do what you choose with your assets is also being threatened.

KYC policies may claim that they are there for the good of the people, but at what cost? It seems that KYC is a bid for control and power over blockchain technology and cryptocurrency, something that scares governments and traditional banks alike because of its decentralized nature and the seemingly unlimited freedom it provides people to do what they choose with their property.