The Effect of Know Your Customer (KYC) Laws on Bitcoin

KYC - Retinal scanning

KYC (Know Your Customer) laws have long plagued the crypto community. A fundamental cog in the world financial system which nearly every major nation follows, KYC requires banks or other third parties to verify the identity of the sender and receiver involved in a transaction. This prevents unlawful actors from using a country’s money, and sets down a paper trail for law enforcement to pore over in the event of an investigation.

This is nothing new. KYC under other names has been de rigueur for decades if not centuries. But it’s become supercharged in the 21st century due to fears over international terrorism and illicit trade. It’s every government’s responsibility to make sure their currency isn’t being put to nefarious uses, but KYC doesn’t always target the bad guys. It prevents impoverished people who may not have access to identification from opening bank accounts, freezing them out of credit which could be life saving. It can be wielded like a cudgel by the majority over minority groups. And most crucially for our purposes, it utterly obliterates any shred of anonymity or privacy.

KYC and the Crypto Paradox

Bitcoin is a politicized currency at heart – a protest in the form of code and value against the perceived encroachment of institutional power into individual rights. Not only does the blockchain enable secure, unalterable transactions to occur without the need for third parties (i.e. banks), it also requires no identity verification to use, and the record it leaves, while permanent, contains little personal information about the sender and receiver.

In theory, Bitcoin is the first step in a “fiscal utopia”, where individuals may conduct business and finance their freedom without fear of retribution. In cases where oppressed groups are shut out of the economy, a cryptocurrency really can be liberating. But anonymity has a dark side. Without oversight, the black market flourishes, and individuals can carry out activities that are incredibly damaging to others. Scams such as ransomware are proliferating thanks to Bitcoin, and the victims are left helpless in the wake of their ruin. Entire countries can use anonymous currency to threaten the world.

This paradox – personal freedom on the one hand, rampant criminality on the other, is deeply etched into the fabric of Bitcoin, and exempting a complete overthrow of the world economy, it seems cryptocurrency will have to sacrifice some of its anonymity at the altar of law and order.

Proof of existing has long required third party verification.

Know Your Customer, Regulate Yourself

Governments have been using KYC as an excuse to interfere in cryptocurrencies for some time now. The US cut Bitfinex off from using US dollars in 2017, and South Korea, among others, has dropped an outright ban on all anonymous exchange accounts. But KYC has reached much further than these limited actions. The west is no longer wild, and crypto’s freewheeling days are already in the rear-view mirror and vanishing at pace. The primary cause? Self-regulation.

As anyone who’s uploaded their ID knows, crypto exchanges are anything but anonymous. Even before the US government began to closely watch Bitcoin and offer arcane statements on its legality, Coinbase was asking their customers to give up their privacy in exchange for joining their ecosystem. Ignorance, after all, is no excuse in the eyes in the law, and the exchange has no interest in seeing its future, mainstream aspirations foiled because they accidentally facilitated money laundering on a massive scale. Unless you’re operating with a TOR browser, or a VPN, expect to offer up as much personal information as if you were opening a bank account or getting a line of credit. (In fact, you probably shouldn’t trust TOR, being a CIA project and all.)

Self regulation is hardly limited to exchanges. As we’ve seen with the recent STO boom, startups are scrambling to get their lawful affairs in order, lest they suffer retroactive punishment. JP Morgan’s banking subsidiaries have banned account holders from trading in cryptocurrency outright, hoping to avoid paying fines for violating any future KYC enforcement, while others have made it extremely difficult for their customers to convert crypto back into fiat in their accounts. In a bit of irony, Barclays has filed for several patents to use the blockchain to streamline and automate the cumbersome verification process KYC demands.

Bitcoin and world finance exist at opposite poles, the former standing for anonymity, privacy, and a borderless life of self-determination, for good or for evil, the latter always seeking more data and more control to its own benefit. The tug of war will likely involve both sides giving up something fundamental of themselves in order to co-exist.


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