What is KYC and Why Do Exchanges Require it From Users?

Fraud and financial crimes have plagued cryptocurrency since its inception. These illicit activities have been an unwanted side effect of anonymous transactions and blockchain technology advancements. There have been multiple cases of exchanges and large banks being charged huge fines for unknowingly housing financial crimes such as money laundering, terrorism, illicit black market deals, and more.

From 2012-2015 for example, the Deutsche National Bank was fined over £163 million for billions of dollars in unchecked and unverified transactions that were associated with illicit financial activity. These types of massive fines have put fear into any platform that houses cryptocurrency, as the ability to anonymously transact prevents the knowledge of what is being done with these funds.

Cryptocurrency fanatics and die-hard believers in decentralized economies argue that there is no alternative, due to the fact that distributed ledger technology was meant to remove any dependence on a single ledger of information to house any kind of sensitive data users need to provide. This simply will not work when trying to scale into the future, as the increased governmental attention requires new startups to prevent their exchanges to be used for black market and illicit deals. This is especially true with anonymous cryptocurrencies.

This is where the KYC, or know your customer, protocol has been found to be effective. This method allows exchanges to fully understand who their customers are by collecting more than the average amount of identity verification information to use a platform. This allows them to be able to ensure that a participant is not tied to a cryptovirology site or corrupt entity that will either use funds illegally or infect the system with a virus or cryptographic hacking code or tracker.

Exchanges simply do not want to be associated in any means to illegal activity, as the fines associated are enough to end any company, especially a startup. The adoption of KYC by the community at large has been difficult, as it appeared to have been encroaching in a fundamental belief in an anonymous digital presence. In truth, the real solution may lie with pseudo anonymity.

What is KYC?

KYC stands for “Know Your Customer”, and it involves a protocol that financial platforms use to know exactly who their users are. The KYC process discourages users of a service from attempting to commit financial crimes or other illegal activities. KYC systems normally involve up to 10 pieces of identifying information about an individual. This information includes:

Full Name




Birth Date

Driver’s License / ID Photo

Bank Statement

While this may seem like too much information to hold, blockchain technology ensures what is called “pseudo anonymity”. This a form of protection where users data is kept private unless a verification is needed. The information held is cryptographically sealed unless the platform needs to act on the KYC, or verify who you are to ensure you are not a cyber criminal.

Why KYC Is Important

Exchanges and Financial Institutions have just recently begun to undergo scrutiny from national and governmental organizations, and this activity has scared a lot of startups and big-name exchanges. These oversight groups have a large influence, and have the right to inflict humongous fines upon exchanges that have been found to house illicit and illegal activity. This type of activity could fuel terrorism, drug trafficking, and even darker corners of the black market as well.

KYC is important because it allows exchanges to prevent this from occurring. Users with dark agendas would never be able to nor willing to provide this much sensitive information that they could be tied to, as this would be publicly viewable by anyone on sites such as block explorer, as well as tie them to the criminal accounts they were transacting with. If you are tied to a transaction that was deemed to be associated with illegal activity, you could be charged for those crimes nearly instantly.

In combination with pseudo anonymous protocols, KYC setups are a necessity for any exchange or fintech platform that is associated with cryptocurrencies, especially anonymous coins such as DASH and Zcash. The community at large may be against disclosing this much personal information to a centralized platform like an exchange, but there is currently no other option.

However, a platform called Civic is aiming to fully integrate pseudo anonymity into all platforms. The Civic platform handles your identity for you, and will provide the necessary info for verification purposes only to any site or platform that is requesting it. Once the information is verified, it is terminated from view by the platform, remaining cryptographically sealed within your civic account.

The KYC movement is an important step in the right direction to help ensure cryptocurrency’s mass adoption, as well its legal and well-intentioned use throughout society. Pseudo anonymity is the only way to achieve this, though, without encroaching upon the decentralized manifesto that the crypto community holds so dearly.

Is KYC Dangerous for Cryptocurrencies?

At its core, cryptocurrency represents a way for individuals to rely less on third party entities and the platforms they use everyday to keep their information secure. The community at large believes all data and private information should be secured and managed solely by the user. Large advertising machines as well as the companies that run them rely on your data and time on the platform to sell ad space. Google itself makes over 90% of its total revenue off of advertising, and this all comes from their users providing them with all of this data.

So, KYC is dangerous in the sense that it does make users provide some sensitive information. But, it is also completely necessary because cryptocurrencies cannot exist in society and not be involved in heavy SEC scrutiny without it. Also, with cryptographic encryption technologies as well as pseudo anonymous methods of storing this information available through revolutionary platforms such as Civic, it may soon be much safer and easier to manage your sensitive information.

Crypto enthusiasts and hardcore decentralized believers must realize that there is a middle ground that must be reached. There is no way the crypto economy could flourish like it is geared to without employing KYC protocols. This does not mean that your info and data will be used and stored by centralized companies, simply that it will safeguard the community from bad intentioned individuals, as well as remove pressure from critical startups working to push the technology into a scalable future. In addition, there are “mixer” protocols that can further anonymize your transaction history and further anonymize your presence if pseudo anonymity is not enough.

KYC is not dangerous to cryptocurrency if it is used in combination with encrypted data and pseudo anonymous protocols that will enable the user to control the disclosure of data. KYC is only dangerous if the info is openly viewable on a distributed ledger, but this will not be case as it would be unrealistic to display everyone’s information openly.

So, new technological breakthroughs such as heavy encrypting and pseudo anonymity will ensure that KYC protocols still adhere to the original mission of Bitcoin and satoshi nakamoto. It will enable cryptocurrency top scale and the average person to gain all of the benefits that this revolutionary technology will provide society.