Why Are Traders Afraid Of Passing KYC On Exchanges?

Almost all cryptocurrency exchanges have introduced user verification - mandatory or voluntary. Why do you need to verify an account and how does identity verification affect the security of a user's money? The development of the cryptocurrency market has not escaped the attention of regulators. Now many countries require cryptocurrency exchanges to implement KYC / AML procedures and mandatory user verification.

In Australia, the United States, Canada, Singapore, South Korea, the United Kingdom, the European Union, and most Latin American countries, cryptocurrency exchanges must register with local regulators and comply with licensing regimes. However, not all owners of cryptocurrencies willingly provide exchanges with their personal data, wanting to remain anonymous and because of fears that personal information will be stolen and used by hackers. And most importantly, they believe that the refusal to verify will allow the tax authorities to escape the attention of the tax authorities. On the other hand, passing verification on a cryptocurrency exchange increases the safety of cryptoassets and serves as additional protection in case of problem situations.

What risks can a user face if they fail to verify their identity?

Is the loss of anonymity so terrible and how do exchanges protect clients' personal data? No wallet, no money: the risks of trading without KYC The presence of an identity verification procedure on most cryptocurrency exchanges is due to legal requirements, but verification is also designed to protect users' assets. In the case of trading from an unverified account or on an exchange without KYC / AML, the user may face a number of problems. Difficulties with compensation in the event of bankruptcy of the exchange According to Crystal Blockchain, from 2011 to 2020, hackers and scammers stole $ 7.7 billion worth of crypto assets.Litigations to compensate users of the MtGox and Cryptopia exchanges have been dragging on for several years, in part due to the lack of KYC procedures or users' refusal to go through them. In the event of bankruptcy and the transfer of the exchange to external management, it will be easier for verified users to receive compensation.

Long-term blocking of "dirty" money

The exchange can block cryptoassets on the user's account if there are suspicions that the money is "dirty" and was used in illegal activities. You can check the purity of coins using various services, but no one is insured against the purchase of cryptoassets involved in suspicious transactions. In this case, to unblock the account, you will need to verify your identity and disclose the source of receipt of the cryptoassets. If verification has already been passed, account blocking can be removed faster. Difficulties with converting to fiat currencies Regulated exchanges with KYC withdraw fiat money from the user's account through the banking system, which is more reliable and reduces the risks of the intermediary. Unregulated exchanges withdraw fiat through third-party payment systems. Such transfers are not transparent, since the working conditions of the exchange and the intermediary are unknown. In addition, the user is not immune from problems with the payment system itself. At the same time, the exchange believes that it has absolved itself of responsibility, since the money has been sent.

Masks dropped: is the loss of anonymity so terrible

Refusal to pass verification on the exchange and trading on unregulated platforms without KYC is often associated with the fear of losing anonymity. However, with the growing interest of regulators in the cryptocurrency industry, it has become almost impossible to remain anonymous and use the services of licensed exchanges. Tax authorities around the world are trying to identify users who hide the proceeds of cryptocurrency transactions, and law enforcement agencies are trying to track down criminals using cryptocurrencies.

The IRS has succeeded the most in tracking down negligent taxpayers. The regulator successfully won two lawsuits against the exchanges Coinbase and Circle, securing the right to access personal data and transactions of their clients. In addition, the tax agency plans to track tax evaders on public blockchains using special analytical tools that have already invested millions of dollars in their development. To maintain anonymity when buying and selling cryptocurrencies, users now need to try and be technically savvy.

Trading on exchanges without KYC, cryptocurrency mixers, confidential cryptocurrencies and other methods help to maintain anonymity, but deprive the user of the opportunity to trade legally. On most major exchanges, anonymous users face difficulties: a limited trading mode, limits on the input and output of assets. It is easier for cybercriminals to withdraw money from an anonymous account. The fraudster can withdraw money to his account, since the user's data, including the address of the cryptocurrency wallet or bank account, has not been verified in the system. This will not happen on a regulated exchange. “Immediately after the introduction of AML and KYC in January 2020, everyone who tried to launder money through the exchange abandoned their accounts and never returned, because they had something to be afraid of,” says Sergey Zhdanov, COO of the EXMO exchange. “But law-abiding traders continued to trade as usual - verification does not hinder them in any way. On the contrary, if fraudsters try to withdraw a large amount, we simply will not allow this to happen. The passed verification will help stop them - they will not be able to send a confirmation selfie with a document. "

Protection of personal data on exchanges Loss of control and the risk of identity theft is the second most popular reason for refusing to undergo KYC. Responsible and licensed cryptocurrency exchanges strive to protect the privacy of their users. Regulated exchanges store users' personal information on separate servers.

The data on the server is encrypted and only a certified AML officer has access to it. KYC employees also have partial access to the servers, but they can view documents only one by one, and each user login is recorded in the system. Special watermarks are superimposed on copies of documents, which prevent the documents from being used for malicious purposes, for example, obtaining a loan on them. “Mass data leakage is excluded - there is no way to get access to user profiles at once,” assures EXMO COO Sergei Zhdanov. “The originals of photographs of identification documents are stored on encrypted servers. The data of the KYC service employee who registers users is recorded in the system. Watermarks on images "spoil" documents and prevent them from being reused by hackers. " Identity verification is becoming a mandatory procedure on the largest regulated cryptocurrency exchanges as the status of cryptoassets is legislated around the world. Passing KYC allows traders not only to secure their crypto assets, but also to be sure that trading is carried out within the framework of the law on a regulated and reliable exchange.