By: Editorial Staff, Date: July 27th, 2021
For years, financial institutions have been required to abide by Know Your Customer (KYC) regulations. These regulations require financial institutions to make an effort to verify the identity, suitability, and associated risks of anyone they do business with. While the overall financial market has been abiding by these regulations for some time now, the rapidly emerging cryptocurrency market is still lightyears behind.
The same privacy controls that make cryptocurrency so attractive to many people also make cryptocurrency a prime target for money laundering schemes. In 2019 alone, an estimated $3 billion was laundered through cryptocurrency exchanges. KYC processes are designed to prevent money laundering, but most cryptocurrency exchanges do not yet have any KYC processes in place. In fact, one study found that half of all cryptocurrency exchanges have KYC processes that were either weak or entirely nonexistent.
Pressure is mounting for these exchanges to adopt policies that will help prevent the abundance of money laundering made possible by cryptocurrency. However, integrating KYC policies into the cryptocurrency model is easier said than done. After all, the anonymity of transactions is one of the key reasons why so many people choose to purchase cryptocurrency. While it is certainly possible for cryptocurrency exchanges to implement KYC processes, it isn’t so easy to do so without harming the allure of their product.
Nevertheless, figuring out how to adopt KYC processes without fundamentally changing the benefits of cryptocurrency is a challenge that exchanges will have to solve going forward in order to ensure the success of cryptocurrency and its acceptance into the overall financial market. If exchanges don’t choose to implement these processes themselves, it is only a matter of time before the government forces their hand. With cryptocurrency becoming a key component in an increasingly wide range of illegal activity – from money laundering to ransomware attacks and beyond – figuring out how to best adopt KYC processes is vital for the future of cryptocurrency.