What is KYC and why is it mentioned frequently in Web3?
Home > What is KYC and why is it mentioned frequently in Web3?
Killian Bell
Sep 29, 2022 7 mins read

What is KYC and why is it mentioned frequently in Web3?

If you’ve already spent some time researching cryptocurrencies or the fascinating world of Web3, you’ve likely stumbled across the initialism “KYC” many times. So, what exactly does it mean? KYC stands for “know your customer,” which is a process many industries employ to identify an individual who uses certain products or services.

If you’re an adult, you likely will have already been subjected to KYC many times throughout your life without even realizing it since it is a standard and essential practice for so many things — and that’s also true within the cryptocurrency industry. Although it’s possible to maintain anonymity in many scenarios, KYC simply cannot be avoided in others.

In this AAG Academy guide, we’ll explain in more detail what KYC is, why it exists, and why it is an important part of the cryptocurrency and Web3 industries.

What is KYC and why does it exist?

We’re all somewhat familiar with KYC because it is used throughout our daily lives in so many different scenarios. If you’ve ever opened a bank account, applied for credit of any kind, taken out a mobile phone contract, used an online service, or even bought a product through the internet, you will have been subjected to KYC processes of some kind.

In the world of finance, KYC is used not only to distinguish one customer from another, but more importantly, to prevent things like fraud, money laundering, and other illegal activities. It ensures an individual really is who they claim to be — and that they can be held accountable for their actions should they choose to do anything they aren’t legally permitted to do.

KYC helps prevent others from opening up credit cards or taking out loans in your name and leaving you responsible for the debt. It helps prevent money laundering to disguise illegal activities, such as drug trafficking and embezzlement. It also helps prevent the funding of terrorism — as well as lots of other things we don’t want to allow in a civilized society.

KYC’s use in the cryptocurrency industry can be a little controversial since, for so many years, using cryptocurrency was a way to avoid processes like these and remain anonymous. However, in certain situations, or if you want to use certain services like a centralized exchange, KYC simply cannot be avoided — and in most cases, for good reason.

Traditional KYC versus KYC in crypto

Traditional KYC, like that carried out by a bank or lender, involves several screening processes that aim to confirm an individual is indeed who they claim to be. It typically requires you to confirm your identity, perhaps with a birth certificate or passport, and other personal details, like your address. It often involves checking your credit history as well.

Traditional KYC, in many cases, also involves ongoing monitoring of an individual. For instance, banks keep tabs on what you buy, who you send money to, and where your money comes from to ensure that your activities are legal and that you are not abusing its services. All of these things are mandatory practices imposed by financial compliance rules.

In the cryptocurrency industry, KYC serves much the same purpose: Its main goals are to confirm a user really is who they claim to be, and that they’re not using certain services for illegal purposes. It also makes cryptocurrency systems, and the entire financial industry as a whole, more stable, more reliable, and more trustworthy.

Just like banks, certain cryptocurrency companies — mostly centralized exchanges like Binance, Coinbase, and Kraken — are regulated by financial authorities in many countries, and are therefore legally required to carry out KYC. This includes collecting a user’s name, address, date of birth, and other identifiable information — and requiring an official ID.

How does KYC work in crypto?

KYC in the cryptocurrency industry works in much the same way as it does throughout the rest of the financial industry. So, when signing up for a centralized exchange account with Binance, for instance, you will be required to submit the following:

  • Your legal name
  • Your date of birth
  • Your address
  • An official ID document

An official ID document, depending on the exchange’s own rules, could include a passport, driver’s license, another government-issued ID of some kind, or your Social Security number. You will also find that these exchanges will only allow you to link your own credit card to your account, so trying to buy cryptocurrency with someone else’s card won’t work.

The duty to carry out KYC is why signing up for a centralized exchange account can take a little while — from several hours to several days — and isn’t instantaneous like creating a decentralized wallet, which typically requires no KYC of any kind. The exchange must use the information you’ve provided to verify who you are.

In addition, many centralized exchanges will carry out periodic checks, just like banks, to ensure that you are not abusing their services to facilitate illegal activities.

What are the benefits of KYC in crypto?

There are many benefits to KYC in the cryptocurrency industry, chief of which is protecting us as users. KYC ensures that it’s incredibly difficult for someone else to create a centralized exchange account using your information, or to buy cryptocurrency using your debit card. This saves us from potential identity theft and fraud that can be incredibly difficult to fix.

KYC can also help curb cybercrime and other illegal activities. The anonymity that the unregulated cryptocurrency world provides can fuel things like ransomware attacks, in which hackers lock down your computer until you send a hefty payment to an anonymous wallet address. If anonymity was more difficult to attain, these attacks would be less common.

The same can be said for other illegal activities in which cryptocurrencies play a massive part. For many years, cryptocurrency has been associated with crime because it is so commonly used to protect the identity of those involved. KYC can help change that and improve the image of the cryptocurrency industry in mainstream society.

References

Frequently Asked Questions

Yes, it is possible to buy cryptocurrency from a decentralized exchange without KYC. However, decentralized exchanges do not accept debit cards, so you may need to use a centralized exchange that does use KYC to acquire another cryptocurrency initially.

When you buy cryptocurrency without KYC, there is no proof of who was involved in the transaction. In other words, if you need support later, or your cryptocurrency is stolen and you want to recover it, it’s difficult to prove you’re the one who purchased it.

Most decentralized exchanges do not use KYC.

No. Although most centralized wallets like those offered by centralized exchanges tend to use KYC to comply with financial regulations, decentralized cryptocurrency wallets do not.

There are risks associated with almost everything you do when it comes to trading cryptocurrency — or using currency of any kind. However, blockchains are incredibly secure by their very nature, so the likelihood of a data breach is incredibly low.

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About the author

Killian Bell
Senior content writer
United Kingdom
Senior copywriter for AAG Marketing team with the focus of educating our community on all things web3, blockchain and Metaverse.

Disclaimer

This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.

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