What is KYC and Why is It Important in the Crypto World?

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BLOCK6

3 min readJun 13, 2022

KYC measures are now required for any crypto platform looking to offer services in jurisdictions such as the United States, Australia, and the United Kingdom as authorities crack down on anonymous cryptocurrency transactions.

As the cryptocurrency industry matures, global and national financial regulators are increasing pressure on companies that provide digital asset services to follow the same rules as traditional banks.

While the balance between privacy and security is still being debated, proper know-your-customer (KYC) measures help to prevent the illegal use of cryptocurrencies.

What is KYC?

KYC stands for “Know Your Customer,” and it refers to the obligation of a financial institution to conduct certain identity and background checks on its clients before allowing them to use its product or platform.

It is part of a larger set of measures used by regulators around the world to combat money laundering.

In other words, it prevents bad actors from concealing their illicit source of funds behind legitimate financial activity.

KYC is one of the most significant regulatory hurdles that cryptocurrency firms have had to overcome in recent years. The decentralized economy is prone to KYC issues by definition.

Many decentralized services are designed to keep customers anonymous and their personal information safe from any central authority. As a result, many crypto firms are unable to identify who their customers are, which regulators find unacceptable.

Why is KYC Required for Cryptocurrency?

Enforcing KYC compliance may aid in combating malicious activity outside of the crypto space, such as ransomware attacks that prevent a user from accessing a computer or network until payment is made. Victims paid nearly $350 million in cryptocurrency to attackers in 2020, who used the anonymity provided by decentralized cryptocurrencies to avoid detection.

KYC may also play a role in improving cryptocurrency’s public image throughout the economy. Stronger compliance, achieved through more stringent identification procedures, may aid crypto in shedding its negative connotation with money laundering and other criminal enterprises. This, in turn, may encourage increased adoption and investment.

Final Thoughts

While cryptocurrency exchanges are now subject to the same rules as traditional financial institutions, some have argued that collecting this data undermines the anonymity of cryptocurrency.

Despite attempts to short-circuit or avoid KYC cryptocurrency regulations, the growing cryptocurrency market and more mainstream appeal virtually guarantee that KYC rules will not only be expanded for exchanges but will also spur increased regulatory enforcement.