Banks and traditional financial institutions are dictated by The Federal Reserve. Banks are required to know certain information about their customers. This would include things like their first and last name or even their social security number.
KYC stands for know your customer. KYC is the set of rules stating financial institutions are obligated to obtain identity and background checks on their clients. These identity and background checks must be done before the customer uses any product or is approved for access. KYC rules were put in place to combat money laundering and other illegal financial acts.
Cryptocurrency is naturally decentralized and allows users to remain anonymous by keeping their personal information private. For this reason, KYC was a huge regulatory hurdle for crypto. Some crypto firms are being pressured and even penalized for not complying with KYC rules. Because of this, some are introducing measures of KYC much to their customer’s dismay.
Some crypto exchanges have announced that new customers will have to present certain KYC eligible information such as facial recognition and IDs to use the platforms.
Cryptocurrency is an international currency now meaning there are different rules and regulations depending on where in the world the trade is taking place. For example, in the EU the regulation for fiat to crypto exchanges must comply with KYC, and crypto to crypto exchanges do not have to comply.
This is very different than in the USA or other places in the world. In the USA, all crypto exchanges are viewed the same and must simply so tome level of KYC regulations.
KYC can be seen asa positive or negative thing for crypto depending who you talk to. It can help fight against illegal money interactions but can take away from the anonymous nature of crypto today. Will smart contracts change the way KYC protocol is collected?
For more information on cryptocurrency and blockchain related topics, check out Equa's blog.