Understandably, the KYC process can oftentimes be tedious. Many crypto exchanges have changed their standard ethos in an attempt to be more accommodating. Many exchanges now run non-KYC solutions that allow users to perform activities on its exchange without requiring them to complete the process.
Many of them implement this solution to avoid the loss of key investors due to KYC solutions. It is perceived by some investors as an additional hurdle to enter the crypto trading market. Most individuals believe the application of KYC processes to the crypto space is a deterrent to cryptocurrencies standard which is to promote anonymous peer-to-peer payment methods.
Some of the popular crypto exchanges, like other financial institutions across the globe, make KYC processes compulsory. Investors resort to going for crypto exchanges that promote greater anonymity by not imposing KYC processes. But, does opting for the latter as an investor mean compromising on safety?
KYC VS Non-KYC
Know Your Customer (KYC) refers to the process of verifying users’ identities done by financial organizations. It is a data-driven process that is done to protect centralized exchanges from malicious or criminal activities. The process is used to check and confirm who customers claim they really are and ascertain their suitability for their services in an attempt to avoid any malicious undertakings.
In contrast, non-KYC services is the process in which you have access to a centralized exchange without the need for customer verification. There is no need to worry about KYC and it provides anonymity in every transaction. In other words, they don't need to know your history to render services to you.
Before you are allowed to use a KYC-centralized platform, you need to submit a copy of your documents. This can be your passport, a certificate of income, a residence permit, or a receipt for payment of utilities. The document requirements vary from one exchange to another, and even region to region.
The document provided is checked on a different server behind the scenes to prove your identity; ensuring it is legitimate and it is for you. These identity procedures help protect the exchange from money laundering, fraud and other financial crimes. But for a non-KYC exchange this process is not needed.
Are Non-KYC Exchanges Really Safe?
The answer to this question lies on your understanding of the following points;
1. Trust Issue
Trust is an issue when considering choosing a non-KYC crypto exchange. They run majority of their operations in contrast to government regulations. As a result of this, a lot of certainty and trust are needed among investors and owners of the exchange.
One of the ways they bypass this is by stating in their agreement conditions that will favor investors. One example is a decentralized exchange such as dYdX that uses untrusted protocols to establish a community-governed trading platform. Proper monitoring of the platform's past history and its community of developers or team members is paramount before embarking on such non-KYC platforms.
2. Data History on Blockchain
Most financial institutions and firms believe crypto to be a money laundering tool used by criminals to conduct untraceable transactions. They believe the reason why most investors chose non-KYC platforms which support anonymity is to avoid penalties. Despite the availability of using non-KYC exchanges, chain analysis study research found out that only 0.15% of all crypto transactions in 2021 were linked to illicit activities.
However, the credit goes to the immutable and secured nature of blockchain. It allows people to retrace owners of the transactions and detect bad actors using crypto — both KYC and non-KYC platforms — to fund their practices. These features allow authorities anywhere in the world to hunt down scammers, fraudsters and launderers of crimes they committed years ago using cryptocurrencies.
3. Restricted Nature of Ownership
One of the problems underlying all centralized exchanges in general is that you will need to trust them with control and security of your asset. As a result of this, you lack the total ownership and control of your assets. It is just like when you store your asset on a centralized exchange you are indirectly giving them your private keys.
Using unauthorized crypto exchanges that are advertised to you exposes you to the risk of losing your assets and funds completely. While both KYC and non-KYC processes require you to hand over your asset to them as third parties, KYC-compliant exchanges instill greater trust among investors and regulators.
The truth is that most crypto exchanges that market no KYC still require you to provide your information to be able to access some functionality on their platform.
Even with authorization from the government, both KYC and non-KYC exchanges are vulnerable to risks like bad intent and shady business practices. Investing with a non-KYC crypto exchange comes with limitations on the trading value, available tokens and other services offered by the provider. When it comes to your money, using the top security protocols always wins.
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