Cryptocurrency is largely known for two things (besides price volatility) and that’s privacy and decentralisation. Decentralisation largely means deregulation and these are huge selling points for crypto. In a world when most of us find ourselves constantly leaving a paper trail, it’s no wonder we crave some anonymity.

Crypto does make it possible to be almost completely invisible while making transactions. While governments may not like this, there’s little they’ve done about it – or can do about it. However, some crypto exchanges and other services require crypto users to show their identity through KYC compliance. But, what is KYC and what is it good for?

It may compromise privacy but it pays off by contributing to one of the other best-known strengths of cryptocurrency: security.

A World Without KYC Compliance

In order to start buying and selling crypto, all you need is a wallet. To make a wallet all that you need is an email. To make an email, all you need is a phone number. This is where the anonymity of crypto comes in.

Let’s pretend that you want to be really shady. Theoretically, you could use cash to buy a cheap phone registered under a fake name and address. You could then use that phone number to create an email, again, no real name or address required. You could then use that email to start a cryptocurrency wallet. A classic stealth move from the early days of crypto was to use cash to buy a gift card. You could then use the gift card to buy crypto anonymously again. Now you’re on crypto and there’s absolutely no way for anyone to trace any of it. That is, provided you have a good VPN that accepts crypto.

That’s a lot of work to remain anonymous. However, you can probably think of a few reasons that bad people would want to do it. All of those are reasons that governments want to enforce a more transparent (read easily observable) system. Think of something similar to the procedure for setting up an account at your local bank. This is very difficult for them to do.

However, many cryptocurrency exchanges regulate their own users to some extent. They do this for a number of pretty valid reasons. For one, they don’t want to be complicit with criminals using crypto for crimes. Also, they want to protect the people that use their exchanges from criminals. After all, if crypto wallets can be made with complete anonymity, how do you actually know who you’re dealing with when you buy and sell?

How KYC Compliance Works

So, how does an exchange regulate crypto? It’s pretty easy. Governments can’t regulate cryptocurrency very easily because it’s decentralised. However, exchanges can simply say follow our rules, or we won’t work with you. The strength of organisations to enforce the terms of use has been all over the news lately. Think of social media sites enforcing restrictions on speech despite the government’s inability to do so. Private entities have the right and authority to require certain things from people choosing to use their platform.

One way that cryptocurrency exchanges do this is by requiring Know Your Customer compliance. Also called KYC compliance, this set of rules enacted by crypto exchanges requires users to identify themselves. It was borrowed from earlier laws in finance enacted to prevent laundering. In most cases of cryptocurrency exchanges, including Bitcoin Australia, this means a number of things.

It means that to make transactions you need more than just an email. Depending on the payment method, you may also need a photograph of yourself, and a photo of your government-issued identification card. Users may also need to provide a picture with the written date of their transaction. That way, if someone steals the photo of the user and their ID they still can’t make illicit transactions.

Now, let’s go back to our theoretical shady crypto buyers. They can still use cash to buy gift cards to buy crypto. They can still use a VPN. But they still need to supply their real name and address. Suddenly, doing crimes with crypto becomes much harder. The exchange is protected, users of the exchange are protected, the world is a safer place. And what’s wrong with that?

Criticisms of KYC

There are criticisms of KYC compliance, some more valid than others.

The biggest cry is from ideological proponents of cryptocurrency. Crypto caught on in cypherpunk communities. In part because of this, many people think that crypto should be completely anonymous on principle. However, even with KYC, doing things like tracking crypto transactions isn’t exactly easy. It’s really one of those things that you only need to worry about if you have something to hide.

Another argument is that KYC compliance can be an obstacle to setting up wallets. This is especially true for younger users. They may not have a formal ID and their names aren’t on utility bills. The obvious counter argument is that maybe minors shouldn’t be getting into cryptocurrency yet. However, if we really want to talk about crypto being adopted as currency rather than investment, opening crypto to minors is a discussion we’ll have to have some day.

Further, even some young adults may not have all of these requirements. They probably have a driver’s license or other state ID but, if they live in a rental or dorm, they may still have a harder time meeting the requirements.

A final argument against KYC is that it doesn’t always work. Again, enforcing KYC compliance is a choice made by individual exchanges. Virtually all major exchanges do enforce KYC. However, if one was to look, one probably would be able to find exchanges that don’t. So, the protester may ask, why should my privileges be restricted to prevent a crime that is going to take place anyway? Because, the ethically-minded person would respond, not being able to stop all crime is not an excuse for allowing all crime. There’s also still the fact that using an exchange that does enforce KYC compliance also protects you from crime.

Why We Need KYC Compliance

The idea of KYC compliance may be against your ideological support of cryptocurrency. It may be a slight obstacle to some users. It may not stop all crime.

However, exchanges that enforce KYC compliance make those exchanges safer for their users. They make the exchanges more hostile to crypto outlaws. And, they legitimise crypto as a form of currency.