During my absence, I have attended a presentation of a bank compliance director who was explaining why Know Your Customer (KYC) and Anti-Money Laundering (AML) measures are compulsory for any bank and what they do in order to detect suspicious transactions. That is the moment I realised how much they rely on knowing their clients’ identity, and have instantly thought about Bitcoin. KYC & crypto is not happening soon, at that level.
Know Your Customer, or KYC, is the process of an organisation verifying the identity of its “customers”. This also implies assessing the risk of the potential client doing illegal activities.
Now, if we look back, these measures have not existed since the beginning with cryptocurrencies. And that is how many people with “bad intentions” have realised that they can mask transactions with Bitcoin. Since governments did not see a major threat in this, criminal organisations such as Silk Road have appeared. Although anonymous, the blockchain of transactions is still public, which makes these coins traceable.
After multiple incidents like Silk Road took place, governments imposed KYC measures. That is why you get background/identity checks when you sign up for a cryptocurrency exchange. Therefore, the coins can be more easily traceable by the authorities.
But the real question is: will KYC ever be at bank level?
The obvious answer is no. Or at least, it should not. It is agreeable for an exchange to ask for personal details when you sign up. But you cannot say the same about when creating a normal wallet. The government is free to monitor transactions between fiat and crypto, but they should stay away from crypto-to-crypto operations. It would be very intrusive if regulations would get to this level.
Many investors or authorities consider cryptocurrencies dangerous especially for the fact that KYC is something that has proven to be incompatible with cryptocurrencies.
There are several ways of avoiding KYC procedures. One example might be LocalBitcoins, where you could easily buy Bitcoin without going through ID verification. Moreover, some of these trades allow you to buy BTC with cash, which makes money laundering through crypto so easy.
Since Bitcoin started from an anti-bank system desire, there will always be members of the community coming up with solutions to avoid each government regulation or restriction that is in place.
There are even more cryptocurrency exchanges that do not require KYC/AML (see a list here).
KYC will never work with Bitcoin. The members of the community are smart enough to find ways to avoid what the authorities are imposing. These background checks are now present at a small level, and so will remain. This small level is what makes them avoidable, as they should be. Cryptocurrencies have been made to break the system.
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