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What does KYC mean in crypto?

Cryptocurrencies, which are based on blockchain technology and provide access to cutting-edge new financial products and services, are disrupting financial systems across the world. Cryptocurrencies, or the digital tokens that represent them, may be traded directly between blockchain users or via crypto exchange platforms that allow for both conventional and digital currency transactions. However, because cryptocurrencies are secured by blockchains that are cryptographically secured, transactions among users are generally anonymous and occur in seconds.

Cryptocurrency’s speed and anonymity make it appealing to criminals looking to avoid AML/CFT detection. According to a Wall Street Journal research, the fraudulence of bitcoin transactions rapidly rose to around $14 billion in 2021, up 79 percent from $7.8 billion in 2020. As of 2022, it is anticipated that between $10 billion and $20 billion worth of cryptocurrency is kept illegally. That is one of the main reasons why KYC is now required by many crypto platforms in jurisdictions like the United States, Australia, and the United Kingdom as regulators crack down on anonymous crypto transactions.

As the cryptocurrency industry matures and expands, global and national financial regulators are putting greater pressure on firms that provide digital asset services to comply with the same rules as traditional banks. There is an ongoing debate about the balance between privacy and security, but appropriate know-your-customer (KYC) procedures assist to prevent unlawful cryptocurrency usage.

But what does KYC mean in crypto?

KYC meaning – “Know Your Customer,” is a regulatory term that refers to the process by which financial institutions verify their customers’ identities and backgrounds.
Before allowing its clients to use its product or platform, a financial institution must undertake certain identification and background checks. It’s one of several measures that global regulators employ to combat money laundering.

KYC conflicts with cryptocurrency exchanges

KYC is one of the most challenging issues that blockchain businesses have faced in recent years. The decentralized economy’s inherent lack of regulation makes KYC concerns unavoidable. Customers may use decentralized services to maintain their personal information hidden from any central authority, just as they would with centralized services. This implies that many cryptocurrency businesses don’t know who their consumers are, which regulators find to be unprofessional and dangerous. Even the most reluctant crypto companies have been compelled to implement progressively more stringent KYC procedures because of mounting pressure and penalties from regulators.

KYC requirements do not apply to decentralized exchanges (DEXs), i.e., those that arrange trades using smart contracts rather than a central trading desk, so they are not required to reveal their identities. Because they are not financial intermediaries or counterparties, these organizations avoid the rules. Users on the platform trade directly with one another through its infrastructure, which is powered by decentralized exchange (DEX).

What are the other risks in crypto trading that require KYC?

Enforcing KYC compliance might aid in the prevention of malicious behavior related to cryptocurrency, such as ransomware assaults that restrict a user’s access to a computer or network until payment is received.
The report by the Ransomware Task Force, a worldwide group of public and private experts, said that crypto technology enables these types of assaults and called for enhanced enforcement of existing KYC rules, among other things.

KYC could also help improve crypto’s public image in the economy as a whole. Greater compliance, through more stringent identification processes, might assist crypto shed its reputation for being associated with money laundering and other criminal activities.
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