If you’re familiar with the crypto realm, you’ve seen and heard the phrases “KYC” and “AML” bandied about a lot. Both names have become synonymous with heated debates in various crypto communities online. But what exactly is KYC, and why is it such a heated topic? Is it truly that significant for everyone interested in cryptocurrencies, and what does it signal for the future of cryptocurrency?
So, if you wish to learn what is KYC, you’ve come to the proper spot. Let’s not spend any time and go right into KYC and its importance in the crypto realm.
What Is KYC Meaning?
Let’s start with the most fundamental question: what is KYC in the first place?
KYC is an abbreviation for “Know Your Customer”. It is a collection of rules requiring financial companies to identify their customers. Cryptocurrency exchange platforms, of course, are under the purview of financial service providers.
After you’ve figured out what KYC stands for, you should know there are several levels of strictness to these requirements. The more established a financial business, the more attention it must devote to how it enforces KYC on its consumers.
The most basic example to show my idea would be regular financial institutions and the aforementioned crypto exchanges. Banks have some of the strictest KYC policies. When you open a bank account, you must provide the institution with a variety of personal and sensitive information.
On the other hand, cryptocurrency exchanges such as Binance implement their KYC standards more liberally. Because of the absence of regulations for the crypto realm, centralized platforms are less intrusive with your personal information.
That brings up another point: in the realm of cryptocurrency, everything boils down to centralization. Only centralized cryptocurrency exchanges do KYC checks on their consumers. You could bypass KYC if you use a decentralized platform. You could stay anonymous in your crypto trading and investment operations.
Isn’t it fantastic? Well, it’s not as good as it appears – it’s a very contentious and two-sided matter. But we’ll get to it in a minute; first, let’s get all the important questions out of the way.
AML vs. KYC
Aside from what is KYC, another popular phrase in the cryptocurrency realm is AML. While these two abbreviations are often interchangeable, I’m here to inform you they shouldn’t be. KYC and AML are two very separate things.
AML stands for “Anti-Money Laundering.” Isn’t it a rather self-explanatory phrase now?
There is one way to think about the link between KYC and AML. The AML is a big, wide category of regulations. Whereas, KYC is a collection of standards that come within those regulations. In a nutshell, AML is an umbrella word, while KYC is one of the major-specific components that fall under that umbrella.
AML isn’t very important in cryptocurrency. Several exchange platforms impose strong AML-related laws and regulations (Binance KYC is one example), although we mainly associated it with larger and more established financial institutions.
KYC Comes in Several Forms
While you may have worked out what is KYC, there are several sorts (levels) of KYC verification that every crypto exchange platform may implement.
These types work on how stringent they are and how much information you – the consumer – are required to give. It’s difficult to identify which of the methods of KYC are utilized on any given exchange to pass the is using checks that lie ahead after creating your account.
Depending on where you check on the internet, you’ll get varied facts – it may quickly become confused! We’ll adopt the widest and most generic classification for simplicity and consistency:
Customer Identification Program
The Customer Identification Program is the most basic and uncomplicated sort of KYC. As the name implies, it entails gathering and identifying information about your customers. This is typically the first step in a larger KYC verification process, but on some exchange platforms, it is also the last step.
This sort of KYC refers to spotting viable concerns before they exist. A financial institution may opt to do various background checks on their consumers via a DD-based procedure. Whether it’s the Binance cryptocurrency exchange or a fiat banking institution, these checks typically closely relate to any financial interactions that the consumer has had or has had in the past.
Most of the time, the DD process does not cause any special steps. If your financial dealing history is shady, the company’s systems will detect it. Also, it will pay greater attention to you during some transactions that you do over their servers.
This sort of KYC relates to the ongoing surveillance of a company’s consumers. It applies to those persons who the company identified as a danger, but it also applies to all parties who use the company’s services. If you engage in any questionable behavior, it may examine you and will block your account.
The three KYC crypto processes outlined above are wide, to be sure, but they cover all the major checks that a consumer may face while utilizing a cryptocurrency exchange.
What Makes Cryptocurrency-Related KYC Unique?
KYC is a contentious issue, particularly in crypto-security. However, we’ll get to it in a minute; first, let’s define the word cryptocurrency.
As mentioned in the preceding parts, cryptocurrency exchange KYC varies from that of a regular banking institution or any other financial organization. While the variances are many and may look perplexing to some, it is crucial to understand that they all derive from the same source – changes in the regulatory character of an asset.
Everything is quite clear for fiat-based organizations. They like to use aggressive KYC since some standards and guidelines govern every single aspect.
However, the situation is entirely different with bitcoin exchanges. The restrictions governing crypto trading vary depending on your state or nation. Some jurisdictions are more lenient and will not require exchanges to watch their clients’ every action, whilst others are the polar opposite and will fight for strict KYC regulation.
However, given the current state of the crypto market, regulatory laws are on the horizon. It’s hardly shocking, really when governments make Bitcoin legal tender, it’s only natural that crypto becomes a topic no one can ignore, no matter how much they’d like to.
Some exchange platforms have been the leading examples by adhering to tougher KYC rules. This ensures user data protection while also allowing crypto to develop from an esoteric notion to a well-established asset class or monetary system.
KYC and Decentralization: A Contentious Relationship
To be honest, it would be hard to define what is KYC without mentioning this specific problem. We’re not going to “touch on” it; instead, we’re going to go to the bottom of this dispute and address all sides of the debate.
As stated in the introduction, KYC often links to centralization. Most of the time, a centralized crypto-related firm would need its consumers to authenticate their identity before allowing them to use its services. This makes it reasonable, given that the corporation in issue is required to follow certain rules and regulations.
Decentralized crypto trading platforms do not require KYC checks. You may trade cryptocurrencies anonymously. Given that decentralization is the underlying idea of crypto technology, it would appear to be an easy decision, right?
Well, in a perfect world, certainly. Though things are far more convoluted.
What is KYC and how does it impact decentralization?
We often see decentralized cryptocurrency exchanges as risky. Anonymity is wonderful, but it also attracts a lot of malevolent parties. You never know who’s on the other end of the screen – it may be a real individual, but it could also be a fraudster.
The second issue, which is quite obvious from the preceding example, is that you never truly know who is behind the decentralized trading platform. If the owners remain anonymous, there will be no one to hold them accountable if, for example, they withdraw all the liquidity and run away with user monies. It would not be the first time such a controversy occurred.
In terms of its criticism, it’s fairly self-explanatory. KYC verification identifies the user, which leads to a direct clash with the underlying principle of cryptocurrency. However, the crypto industry is at a place where we can no longer disregard the problems of decentralization.
KYC adds security, dependability, and responsibility. While it may not be ideal for any crypto aficionados who want the underlying theory behind the concept to remain true, with harsher laws on the horizon, there is no way to prevent it.
Another major issue in people’s skepticism about KYC-enabled crypto exchanges is the fact that there have been cases of user information leaking because the exchanges in question have less-than-ideal security procedures in place. Again, it boils down to a lack of industry regulation – some exchange platforms take shortcuts for customer data privacy and security, which hackers may exploit.
To avoid this, you should always use a reputable exchange platform for all of your crypto tradings. Binance, the world’s largest cryptocurrency exchange, is an excellent example. Binance only employs the finest data security procedures and has no history of being hacked, breached, or user data being leaked to unscrupulous third parties.
If you wish to do anything even linked to cryptocurrency, you must first grasp what is KYC and what function it plays in the crypto sector. While it’s not an easy or “pleasant” topic to dive into, it’s honestly required – if you grasp the KYC meaning, you’ll also understand the sector a lot better!
As you may have guessed, KYC is a contentious issue. Considerably in the fiat world, it is contentious, and when viewed through the lens of decentralization, it becomes even more complicated. The result, however, remains the same: it helps the crypto community stay secure, while also helping to keep fraudsters and con artists at bay.