The KYC procedure, or, how data can become a commodity


Start Trading on 3Commas Today

Get full access to all 3Commas trading tools with free trial period

Financial markets are a fundamental aspect of the modern lifestyle and the system in which we are living. The function of such markets is supported and ensured by financial institutions, like banks, asset exchanges, and corporations. In order to ensure control over the circulation of capital within markets, there are many organizations which ensure compliance with the Anti-Money Laundering (AML) procedures. AML policies are a set of measures and rules aimed at combating the money laundering of illegally obtained funds.

In today’s article, we will talk about the Know Your Customer (KYC) procedure, which is a part of the AML complex of measures, helps fight money laundering by collecting data about any users executing financial transactions. We will consider the types of procedures, their application and expediency, and talk about the nuances that await users when going through these procedures.

What user information is collected?

The cryptocurrency market, like any other market, is one of financial transactions. Although cryptocurrencies are often associated with anonymity and privacy, the reality is a bit different.

Almost all exchanges and custodians comply with AML standards, which allow them to determine:

  • Who performs the transaction
  • Where the funds are going and whether a particular operation is legal
  • Where the funds are coming from and the level of risk

KYC is a procedure whereby financial institutions are required to ask their users to verify their identities in order to conduct financial transactions. Identity verification allows the companies, exchanges, or startups to ensure that their customers are who they say they are.

The process of verifying a customer’s identity may include:

  • Identity verification using a passport or driver’s license
  • Proof of residency and jurisdiction through a bank statement or utility bill
  • Selfies with required documents
  • Biometric data like facial recognition or fingerprint scanning

KYC procedures are mandatory for all financial institutions falling under the legal influence of regulatory authorities.

Most of the major exchanges and custodians in the cryptocurrency industry fully or partially comply with KYC procedures by collecting data about their users. Identity verification can often consist of several steps depending on the jurisdiction, peculiarities, and volume of the financial transaction.

Is it safe?

Many users question whether their personal data is safe when registering on various websites and exchanges or participating in ICOs and IDOs. Data security is vital in these instances as such data often gets leaked or may be vulnerable to fraud.

The fact is that, when running an ICO or IDO, many projects comply with the norms of regulators to ensure the process is smooth and there are no mishaps with authorities. Given the vast number of crypto projects launched, there are bound to be fraudulent actors or those that fail to adhere to strict safety and security standards for the confidentiality of user data. It is worth considering this factor because depending on the amount of personal data provided, this information can be used for fraudulent purposes without your consent.

Scans of passports and selfies are presented in large quantities on various platforms. Scammers can use this data to obtain online loans or for registering on third-party platforms and services. It is also necessary to be careful about the sites that request your personal information, which can become a target for scammers.

Many cryptocurrency exchanges, as well as large P2P exchange platforms, request user data only when certain transaction limits are surpassed. As cryptocurrencies become more popular and their popularity grows, regulators are trying to control financial flows through cryptocurrencies. This has created a change in an industry which only a few years ago was much freer from regulations.

What should be considered when undergoing the KYC procedure?

When submitting personal data on cryptocurrency-related platforms, there are many factors to evaluate in order to avoid falling prey to identity theft. It is necessary to remember that your private information is valuable not only for fraudsters but also for advertising companies and financial managers who can also use this information against you.

Today, the decentralized cryptocurrency space provides many financial opportunities without the need to rely on third parties or identity verification.

If it is necessary to pass the KYC procedure, it is worth taking a closer look at the service which asks for personal information and the amount of information to be collected. Also, note that many exchangers or custodians may request additional data, revealing the source and the ownership of funds.

Before verifying, be aware of the restrictions for certain jurisdictions. Many projects, startups, and exchanges limit access for users from countries that prohibit their citizens from using such financial services. When withdrawing funds from exchanges or custodians, it is worth considering the tax implications, especially in the context of full or partial cryptocurrency regulation.

Prospects for the development of user identity verification solutions

According to a study by CipherTrace, about 56% out of 800 centralized digital asset-related service providers do not fully enforce user identity verification procedures. Among decentralized exchanges (DEXes) the figure is much worse, reaching 81%. The inability of regulators to fully enforce such procedures is due to the uncertain legal framework and peculiarities of cryptocurrencies’ architecture.

At the moment, many different solutions are being developed to form a reliable and convenient environment for passing the identity verification procedure and solutions for identity confirmation and data management.

Touching on decentralized solutions and protocols, digital identification-oriented protocols and projects already exist. For example, the Traceto project that offers the development of a global decentralized KYC network using smart contracts and AI, or IBM Blockchain Trusted Identity — a decentralized blockchain-based platform for identity verification.


Cryptocurrency users are divided into two camps: some are in favor of regulation, which they believe will reduce the risks of using cryptocurrencies and provide a convenient, fast and secure way to convert funds from crypto space to fiat currencies, while others believe that regulation will lead to increased data fraud and total control by regulators, especially since it contradicts the original concept behind cryptocurrencies. In any case, users always have a choice in the form of alternative decentralized solutions and other ways to conduct financial transactions.