KYC (Know Your Customer)
Know Your Customer (KYC) is a form of user or project identification similar to the Anti-Money Laundering (AML) process. It involves verifying your identity, with the goal of preventing money laundering and suppressing organized crime on the Internet. When an exchange asks you for KYC, it means verifying your identity.
In the crypto world, KYC will mostly demand centralized exchange (CEX).
- Full Name
- Phone number
- One valid document (ID, driver's license or passport)
- Confirmation of residence (e.g., electricity bill or bank statement showing your name and residence)
KYC also covers crypto projects. If a project has KYC, one or more of the project developers have submitted their personal information to an agency that has then verified their identity. This gives the project credibility with investors, but there are fraudulent practices here as well. For example, fictitious identity verification agencies exist, as does the practice of providing false or stolen data. If such a project were a fraud and funds were then stolen by the founder, the agency behind the identification would take legal action, typically taking the project to court, prosecuting it and recovering the amounts owed.
- Market stability – the crypto world is highly volatile and unpredictable due to pseudo-anonymous transactions. KYC brings confidence to investors
- Protection against theft – thanks to KYC, CEX can shut down users involved in illegal activities and prevent major financial damage
- Reduced risk of fraud and illegal activity – 8.6 billion USD’s worth of cryptocurrencies were laundered in 2021, highlighting the importance of using KYC in this sector
- CEX holds your personal information (scanned ID, driver's license or passport)
- If you are suspected of committing illegal activities, your information is passed on to the authorities of the country where you live
- Misuse of personal data
- KYC is sometimes not a 100 % guarantee of a safe investment
KYC is designed to prevent money laundering and the financing of illegal activities.
By sending and collecting personal data from users, CEX can exclude suspicious users and keep platforms safe.
KYC protects your funds from being invested in unknown projects.
However, it has its cons. For example, it can be time-consuming and frustrating for users. Additionally, there is always the risk of hackers stealing user information from CEX.
Overall, the KYC process is seen as a necessary evil by the cryptocurrency community. It's not perfect, but it's one of the best ways to keep CEX safe from fraud and crime in the eyes of the law and in terms of regulation.
The entire crypto world, and DeFi in particular, is overrun with various scams and hacks. Thanks to KYC, these scams will eventually be all but eliminated, so that no newcomer to DeFi can just lose their funds. However, KYC makes the decentralized world more centralized and breaks down the anonymity that makes the crypto world so popular and different from the traditional world of finance. If you're going to enter a DeFi project or do anything else in the crypto world, always DYOR (Do Your Own Research) to eliminate the loss of your funds.