What is KYC and why it is a requirement for exchanges?

KYC (Know Your Customer), refers to the verification process that customers to go through in order to:

  • Verify their identity and link it to a cryptocurrency wallet
  • Get a better understanding of the potential customer’s activities and determine whether or not these are of legal nature.
  • Evaluate the possibility of money laundering risks associated with a particular customer.

What is the process of a KYC?

In the context of cryptocurrency, most exchanges will require you to go through a crypto KYC process before buying and cashing out your Bitcoin or other cryptocurrencies. The process of doing so is pretty straightforward.

  • You will need to provide your full name, residential address, and phone number. This will ensure that you will pass the initial stages of the verification. 
  • Then you may be asked to provide a copy of your legal documents, such as an ID or a passport. Exchanges will request not only a photograph of the official document but also a selfie with you holding the document, to verify that the document belongs to you.
  • Finally, a few cryptocurrency exchanges may even go as far as asking information about your occupation, a utility bill and official proof of address.

Why is KYC mandatory for most exchanges?

ID verification, in this case, KYC for crypto purchases, has become mandatory for all exchanges and cryptocurrency wallets that exchange cryptocurrency.

This effort has been actively ongoing since the latest bull market and serves two particular purposes:

  1. Eliminate the illegal use of Bitcoin – Bitcoin has been used for many illegal activities due to its pseudo-anonymity. By whitelisting as many Bitcoin wallets as possible, authorities hope to be able to backtrack illegal activities back to the people responsible. It is for that reason that it is also mandatory for cryptocurrency exchanges to ask their customers to fill in an AML form (short for Anti-Money Laundering). For more information, click here.
  2. Decrease tax fraud – US citizens did not like the idea of filing for Bitcoin taxes, after the massive price surge of 2017. More specifically, only 892(!) people gave information with regards to their holdings in their Coinbase account. This happened during a time where Coinbase already served many millions of people from all over the world.

Overall, cryptocurrency-related KYC has become a regulatory requirement of most countries where Bitcoin is legal.

The argument for this is simple. Why ban something that can bring in a lot of tax money if handled properly?

And while this effort seems to be working, it does go against the beliefs and hopes of Bitcoin’s creator, Satoshi Nakamoto. He created Bitcoin as a solution to the financial limitations imposed by governments.

What effect does KYC have on decentralization and anonymity?

One should not have to worry about his identity if they do not intend to perform any illegal activities. KYC is in place to ensure the proper use and exchange of Bitcoin and other cryptocurrencies.

However, it does affect decentralization in a negative way. This is because, once again, governments and financial institutions know how much Bitcoin you are holding and where you send it to.

That being said, there is still an option to create “anonymous” bitcoin wallets.

Simply use a hardware wallet as a means of storage, and not as a way to exchange cryptocurrencies.

This way, and with the creation of a new wallet for each incoming transaction, one can be sure that his privacy will be ensured.

Additionally, if you wish to skip KYC and still exchange Bitcoin, you can do so with several payment systems. We analyze those in detail in the following post. Make sure you read through all the options carefully and use Paybis exchange for your next transactions.