Are non-KYC crypto exchanges as safe as their KYC-compliant peers?

Published at: Aug. 20, 2022

Many see implementing Know Your Customer (KYC) tools in crypto as a deterrent to the Bitcoin (BTC) Standard, which has predominantly promoted anonymized peer-to-peer transactions. However, regulators stay put on promoting KYC and anti-money laundering (AML) implementations as a means to ensure investors’ safety and protection against financial fraud. 

While most crypto exchanges have begun implementing regulatory recommendations to remain at the forefront of crypto’s mainstream adoption, investors still have the choice to opt for crypto exchanges that promote greater anonymity by not imposing KYC processes. But does opting for the latter as an investor mean compromising on safety?

A matter of trust

Anonymity goes both ways in most cases. Owners of crypto exchanges running non-KYC (or non-compliant) operations often choose to remain anonymous to avoid legal scrutiny. As a result, investors must have a high level of trust in the people responsible for running the exchange.

On the other hand, decentralized exchanges such as dYdX use trustless protocols for establishing a community-controlled trading platform. This, in turn, instills trust within investors despite no mandate of KYC on the platform.

Therefore, monitoring the platform's track record and the people running it becomes paramount when trading on non-KYC platforms.

Blockchain remembers forever

While the suits backing traditional finance portray crypto as tools of money laundering, illicit cryptocurrency transactions have consistently declined year-over-year. Despite the ease of using cryptocurrencies without KYC verification, a Chainalysis study confirmed that only 0.15% of all crypto transactions in 2021 were linked to illicit activities.

Moreover, immutable blockchain records allow authorities to retrace owners of the transactions, further deterring bad actors from using crypto — both KYC and non-KYC platforms — to fund their practices.

The permanent nature of blockchain has allowed authorities across the world to hunt down scammers, fraudsters and launderers of crimes they committed years ago.

Not your keys, not your coins

One of the biggest concerns when operating with crypto exchanges is the lack of control over the assets. Cryptocurrencies stored over crypto exchanges mean handing over the private keys to the exchange.

Using unvetted crypto exchanges that market no KYC requirements exposes investors to the risks of permanently losing their funds. While both types of exchanges — compliant and non-compliant to KYC — require investors to hand over their crypto assets to third parties, KYC-compliant exchanges instill greater trust among investors and regulators.

The answer to the question ‘Are non-KYC crypto exchanges safe?’ lies in understanding the abovementioned nuances. KYC or not, crypto investors remain equally vulnerable to the risks related to external factors such as the intent of the owner and shady business practices, in addition to getting no backing from the government.

Additionally, investing with a non-KYC crypto exchange comes with limitations on the trading value, available tokens and other services offered by the provider.

Tags
Adoption
Blockchain
Regulation
Business
Cryptocurrency Exchange
Decentralized Exchange
Aml
Kyc
Related Posts
Implementing the double-edged sword of KYC is a must for crypto exchanges
During 2017’s bull market, most crypto services lacked the proper Know Your Customer and Anti-Money Laundering measures. Even in 2020, 56% of the analyzed 800 cryptocurrency exchanges and over-the-counter trading desks followed weak KYC practices, according to a CipherTrace report. However, the current digital asset rally has turned the crypto market upside down. As a result, KYC and AML have become top priorities for cryptocurrency providers, with many industry players rushing to implement proper measures to better know their customers. And it’s not just the providers that are increasingly demanding KYC, but also their clients. This trend began in January …
Adoption / April 3, 2021
Blockchain and crypto can be a boon for tracking financial crimes
Governments around the globe have also become more aware of the crypto market and the various ways in which it can be regulated. Despite a growing adoption rate and involvement of mainstream financial giants, however, naysayers continue to portray crypto as a tool for miscreants and criminals. Several crypto platforms and decentralized finance (DeFi) protocols have been compromised over the years, owing to various code vulnerabilities or centralization problems. However, stealing of money is the easiest part, while moving that money and cashing it out is nearly impossible. This is primarily because most crypto transactions are recorded on a public …
Adoption / April 28, 2022
eToro to delist Cardano by 2022 for US users due to regulatory concerns
In a statement released to customers on Tuesday, Israeli cryptocurrency exchange eToro announced it would delist Cardano (ADA) and Tro (TRX) for U.S. customers by the end of the year. After Dec. 31, U.S. users will no longer be able to open new positions in the tokens nor stake ADA and TRX. In addition, wallets will be effectively in withdraw-only mode until the first quarter of 2022, where selling will also become limited. In making the decision, eToro cited regulatory concerns surrounding both assets. The move came as a surprise to some as ADA has not been traditionally associated with …
Adoption / Nov. 23, 2021
Want to weed out ransomware? Regulate crypto exchanges
Just between July 2020 and June 2021, ransomware activity soared by a whopping 1,070%, according to a recent Fortinet report, with other researchers confirming the proliferation of this mode of extortion. Mimicking the prevalent business model of the legitimate tech world, ransomware-as-a-service portals popped up in the darker corners of the web, institutionalizing the shadow industry and slashing the skill ceiling for wannabe-criminals. The trend should be ringing a warning bell through the crypto ecosystem, particularly since ransomware attackers do have a knack for payments in crypto. That said, the industry that was once a Wild Wild West is now …
Blockchain / Feb. 20, 2022
Identity is the antidote for DEXs’ regulation problem
Regulators from Europe, the United States and elsewhere are busily hammering out details on how to designate decentralized exchanges (DEXs) as “brokers,” transaction agents or similar entities that affect a transfer and cooperate with each other. The U.S. called for multinational cooperation in its executive order on responsible digital asset development, as did the European Union with its recent Financial Stability and Integration Review. And that is just what’s publicly accessible. Behind the scenes, the whisper of regulation is getting louder. Did anyone notice that all the Know Your Customer (KYC) requirements have been laid on smaller centralized exchanges in …
Blockchain / May 29, 2022