Not to be confused with the fast-food fried chicken chain, banks have had to comply with KYC (not KFC) practices for several years now. In the US, KYC emerged out of the Patriot Act, the Bush administration’s response to 9/11. One of its aims was to prevent any future financing of terrorism. But, this goal has tripped into crypto and it has no place here beyond ‘Big Brother’ wanting to know what everyone is doing all the time.
Confusion and Uncertainty in Traditional Finance
Globally, KYC and AML (Anti Money Laundering) requirements are changing all the time. That creates confusion, uncertainty, and delays in onboarding customers. Lack of clarity on KYC requirements means that there’s no real standard to follow–even within the same jurisdiction. This results in financial services institutions (FSIs) implementing their own variations of KYC.
And since they’re terrified of being found non-compliant and facing crippling fines in the millions of dollars (Deutsche Bank was fined over $200 million for unacceptable AML protocols in 2017) they tend to err on the side of caution. This makes KYC unnecessarily complicated.
No Place in Cryptocurrency
Now let’s consider cryptocurrency exchanges dealing with global customers where different laws apply. While KYC is in its infant stages in this industry, there are already plenty of problems caused by it and a lot of guesswork and noncompliance.
In fact, a 2018 study by PAID found that two-thirds of cryptocurrency exchanges in the US and EU (where KYC is required) fail to comply with requirements. They ask for nothing more than an email address and a phone number. So, that means they don’t know much about their customers after all. And flash-forward to 2020, even with the strict AML5 directive in Europe, not that much has changed.
This is still the main reason why the vast majority of banks are hesitant to work with cryptocurrency exchanges, forcing them to relocate to friendlier pastures and set up accounts in small and nimble jurisdictions like Lichtenstein or Switzerland. So, what are the main issues with KYC and why is it failing so miserably right now?
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Customers Don’t Like KYC
Tough luck, you might say, if your customer happens to be a criminal. Of course they won’t like being forced to reveal their identity. But no legitimate operation, be it a cryptocurrency exchange or FSI, wants profits from drug sales or human trafficking floating through their systems.
At Digitex, we want to represent the interests of upstanding citizens, not criminals. However, the downside of KYC is that it punishes the sweeping majority of investors who are decent people and simply want to sign up and start trading. It’s a massive barrier to onboarding and makes the difference between people signing up to trade and simply deciding it’s not worth the trouble.
It also leaves exchanges vulnerable targets for hackers looking to seize sensitive data. At Digitex, we don’t need to know everything about you for you to use our platform. We believe that we all have a certain right to privacy and that exercising that right does not make you a criminal in any way. That’s why you can sign up for our exchange with just an email address – we removed all the need for KYC on our exchange.
Removing the need for KYC allows us to be more agile than other exchanges that rolled over and decided to ask their customers for their sensitive information. Many a crypto exchange has missed out on customers thanks to the frustrations of KYC pushing them to an offshore competitor. Others have been forced to shut down. We want to see Digitex succeed and we believe this will play a pivotal part in that.
KYC Is Expensive
Not to mention that removing KYC will allow us to save costs. KYC is extremely expensive. Banks are already spending around $500 million per year on KYC and it’s pushing up the cost of onboarding new clients. And if the costs of KYC are prohibitive for large banks, just imagine how that affects smaller cryptocurrency exchanges!
Against the threat of fines or having their businesses shut down, plenty of cryptocurrency exchanges are scrambling to comply, asking users to upload an ID card or perhaps an additional note proving they are who they say they are, signed and dated. But, again, as with banks, this KYC process is performed with poetic license, with each exchange coming up with its own version.
KYC takes up a severe chunk of their profits and a lot of their time. Not only collecting and validating data, but also the risk associated with storing it (as we witnessed ourselves at Digitex). After all, if exchanges can get hacked for crypto, they can also get hacked for data.
Our goal is to allow for frictionless, commission-free trading. The last thing we want is to drag our customers through invasive fact-checking missions that delay onboarding and affect liquidity.
Verification Isn’t Portable
Since no one exchange can cover all the needs of cryptocurrency traders, they must work with more than one. Fiat to crypto, crypto to crypto, OTC trading, and futures. And customers have to through the lengthy process over and over again at the next exchange.
Unlike showing a passport as a universal and acceptable form of ID, KYC has no standard from bank to bank, exchange to exchange, country to country. You may need to show a utility bill, a national ID card, a passport, or a selfie with a note. You may not be allowed to use the exchange at all. Not to mention the fact that some people don’t even have government-issued IDs.
KYC is imposed top-down by Big Brother as an excuse to monitor the crypto space and we’re taking a stand. We’re already doing what is required by blocking all US users and users from restricted countries. But we won’t make all our users jump through hoops just because overzealous regulators say we should. Come join us today and trade zero-fee and commission-free.
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