There is much debate regarding cryptocurrency KYC (know-your-customer) requirements among digital currency enthusiasts. The stipulations for KYC have long been an issue for those who place importance on their anonymity, but many also see KYC as a way to deter large groups of people from the financial system. Deemed to be “high-risk”, some groups of people with poor documentation are not worth the compliance cost. Additionally, there is a growing concern that innovative products and solutions have ceased to be developed because they failed to fit, or could not afford new cryptocurrency KYC compliance.
Collecting identifying information about customers of a service by requiring user photos, identification, and proof-of-residence is required to make sure users are qualified to partake of a service. While submission of such documentation may discourage the underage, illegal resident, or criminally motivated from using a service – it also generates a database that can be used by law enforcement or government entities. The use of KYC and AML (anti-money-laundering legislation) have long existed for forex, gaming, and fintech businesses, so it was inevitable that cryptocurrency KYC would invade the scene eventually.
Many believe that a component of cryptocurrencies is anonymity, therefore it is not difficult to imagine why KYC requirements are being forced upon users of exchanges. The decentralized and anonymous nature of digital currency opens up the possibility of criminal abuse, and KYC legislation wants that element removed. Platforms that allow users to buy, sell or trade digital assets are now required to obtain KYC documentation or be shut down. Peer to peer exchanges currently get around KYC compliance, but for how long?
Implications of Cryptocurrency KYC
Bitcoin and other cryptocurrencies are not backed by any government and do not identify users by name, though they are tracked by blockchain, an innovative way to keep a decentralized, public, secure record of all transactions. With more and more investors and younger consumers becoming users, cryptocurrency is gaining adoption and becoming commercially viable. The increased demand has already resulted in widespread adoption of KYC to serve as a check and balance for exchanges buying fiat and converting it to crypto for trading.
While the alternative to “no regulation” results in sites like Silk Road, many argue that KYC/AML amounts to global surveillance and directly conflicts with privacy and disintermediation – or cutting out the middleman. At the same time, KYC adoption is quickly becoming a necessity for regulatory entities evaluating cryptocurrency exchanges. Solutions that manage to adhere to KYC practices without destroying the promise of the technology are needed to satisfy requirements of both users and regulatory bodies if mass adoption is to become a reality.
The beauty of the situation is that the technology behind cryptocurrency might also be used to develop new protocols that not only improve privacy and security but also reduce costs. Such new protocols and procedures would go a long way toward removing the barriers to mass adoption and opening the way for more businesses to accept cryptocurrency. Another major benefit would be the ability for groups that do not have traditional “legal ID” to have access to the financial system. New KYC methods that use strong cryptography and are decentralized would give more people ways to prove credibility, transact and participate in the global economy.
Institutional investors and financial institutions are legally obligated to require KYC procedures. Recent studies show that out of twenty-five crypto exchanges, only 68% require thorough KYC procedures. The ability to use the exchanges to easily trade digital currency for fiat and vice versa, with no questions asked, is about to come to an end.
Yoti is a global identity platform available in a free app that puts your ID on your smartphone. It was founded in 2014 as an identity platform that promises not to mine or sell user data and is not designed to permit doing so. Yoti users can prove their age or identity to businesses or individuals. It can also be used to sign up and log in to website exchanges. Web forms and passwords are replaced when Yoti uses your unique biometrics to prevent fraud and remove the inconvenience of having to remember multiple account access details. Yoti is free and anyone over the age of 13 with an approved ID document can use the app to verify their identity quickly and easily.
Yoti applications allow businesses to know exactly who their users are in seconds. Sharing data responsibly with individuals builds trust and transparency – as well as saves time and money. More importantly, it allows businesses to comply with KYC regulations without putting an individual’s personal data at risk. AES 256 bit encryption protects data while allowing safe connection between people and businesses using the Yoti app.
Should Yoti become popular and widely adopted, it could be used for authentication by websites, supermarkets, healthcare providers, governments, and other organization that require KYC compliance. When a company wants to verify a user, the user is presented with a QR code that can be read with their Yoti app. The process takes seconds and costs for businesses using the service are very low. Individuals pay nothing to use the service or download the app. Individuals are the only ones who see their own data, providing encrypted fraud protection. Additionally, there’s no longer a need for individuals to present their personal identification documents to gain access or use for services.
Electroneum (ETN) now uses Yoti to handle all its KYC checks.
Electroneum is set to become the first cryptocurrency in the world to comply with KYC requirements. Built off the Monero codebase to allow for transactions on a decentralized blockchain, like Monero, Electroneum has some built-in privacy features. Electroneum makes acquiring cryptocurrency as simple as downloading an app. Many people that want to buy aren’t willing to provide photo ID such as drivers licenses or passports to a website they know nothing about. There is also much hesitation to link bank accounts to exchange websites in order to purchase cryptocurrency. Electroneum feels they have the solution and being the first to manage cryptocurrency KYC could be very beneficial.