How Does KYC Limit Cryptocurrency Mass Adoption?

What is KYC?

Know Your Customer, commonly known as KYC, refers to processes that analyze a user's identity. This procedure allows financial institutions and digital asset platforms to examine a customer's background as they extend their services. Generally, users have to submit their personal data to access a crypto platform's services. KYC serves as a safety mechanism that eliminates bad actors from committing any financial crime. Such crimes may include activities like money laundering, illegal trafficking, terrorist financing, and many more.

How KYC Limits Cryptocurrency Mass Adoption

KYC may affect the acceptance rate of digital currencies in the following ways:

1. Impersonation 

A number of crypto-based projects may ask for private user-data to access their products. Once this information falls into the wrong hands, cases of impersonation may begin to spread. By definition, impersonation involves the act of stealing a user's data to perform fraudulent activities. Hence, attackers can use an individual's identity to obtain funds from illegal sources or undertake money laundering. Impersonation could create a bad track record for innocent users who are profit-oriented. Thus, such a barrier can suppress the mainstream adoption of virtual currencies.

2. Constant Regulatory Scrutiny

Failure to adopt KYC could attract significant regulatory intervention, thereby limiting cryptocurrency mass adoption. In most cases, government bodies might enforce heavy penalties on crypto-based platforms. The act of penalizing inhibits the growth of upcoming projects in the crypto industry.

3. KYC Bypasses Crypto Privacy

Transacting in the virtual asset space eliminates the need to use personal data. At the very least, users will only require an address and a digital wallet to perform a trade. Transaction details are then stored in a blockchain network without revealing the transacting parties. Therefore, the concept gives cryptocurrencies an anonymous layout that conserves the principles of crypto privacy. Introducing KYC bypasses this privacy since platforms will request personal information to render their services, thereby, limiting cryptocurrency mass adoption.

4. Security Concerns

Implementing KYC could raise security concerns which could lead to financial losses. The process might compromise a user's holdings particularly when they are operating with an online platform. Thus, cybercriminals can leverage KYC details and illegally obtain the users' funds.

5. KYC Bars Decentralization

In the crypto sphere, decentralization represents a structure that operates without any central supervision. Multiple decentralized computers are responsible for verifying every transaction in a blockchain network. This structure ensures that the decision-making process remains in the hands of the community. More importantly, transactions get verified faster than in centralized banks. Enforcing KYC limits the idea of decentralization because platforms will have to follow the regulators' requirements.

KYC Conflicts in the Crypto Space

The pressure to implement KYC is becoming more apparent in various crypto platforms. These demands come from different regulatory bodies which advise crypto exchanges to collect private information. Examples of such platforms include:

Binance

In 2021, Binance was under the watchful eye of regulators situated across different countries. The exchange sought to strengthen its verification requirements as a means of minimizing lawful scrutiny. At the moment, Binance's KYC requires users to submit their government IDs and pass through a facial verification process.

This procedure allows customers to access basic services like crypto trading, withdrawals, and deposits. The new guideline also requires existing users to comply with the verification process. Hence, users who fail to complete the procedure will have limited access to Binance's services. Ideally, an incomplete KYC only gives access to withdrawals, redemptions, and order cancellations. The move by Binance was a necessary step that would aid in reducing the friction between them and national regulators.

BitMex

BitMex is yet another exchange that made adjustments to its KYC requirements. Before, customers would only provide their email addresses and create a password to trade with the platform. Later on, BitMex began to request additional information like a user's trading experience and location. Introducing this mechanism enables BitMex to explore more opportunities as it complies with the governing bodies.

Conclusion

KYC procedures oppose several principles that cryptocurrencies uphold. In essence, the digital asset economy embraces features like decentralization, privacy, and security. Requesting personal data from users deviates the original idea that virtual currencies carry. As a result, investors may become susceptible to identity theft and other cyber-related activities. KYC could also limit innovation since platforms will have to follow every set guideline. In some cases, these platforms incur hefty penalties for failing to adhere to the regulatory institutions. As such, constant regulatory pressure to instill KYC not only hinders innovation but also cripples cryptocurrency mass adoption.