All centralized crypto exchanges have a verification procedure. Lately, it is becoming one of the most important procedures in order to use the exchange functionality.
The requirement to complete verification on Binance
In August of 2021, one of the largest cryptocurrency exchanges, Binance, made verification a requirement for all new users. Users who were already registered at the time of the introduction of the new rules are strongly encouraged to complete the identity verification process.
If the user ignores this requirement, most of Binance's services and products become unavailable.
All large exchanges will follow the suite and will implement the verification requirements to comply with the regulators in fighting financial crimes such as:
1. AML (Anti Money Laundering.) It entails the monitoring of transactions and obtaining personal data confirming that the client is not involved in illegal financial activity.
2. KYC (Know Your Customer). This is the verification procedure of the client's personal data with the submission of copies of identifying documents.
Now customers of centralized crypto exchanges will have to verify their identity and place of residence. Otherwise, they will not be able to place digital deposits, trade coins/tokens, and freely withdraw the earnings.
Changpeng Zhao, founder, and CEO of Binance exchange said that such measures are being taken with the aim of creating a sustainable ecosystem that is safe for all participants.
But the truth is said, the real reason is the pressure of the regulatory bodies to exercise control over the crypto market. This is supported by information from Binance's July 2021 report.
The report of the online edition ForkLog shows multiple complaints against exchanges by the regulators of several countries. All these points to an increase of the regulatory pressure on large exchanges, and Binance in particular.
What do you need to know about KYC and AML?
These are two different requirements used to counter fraudsters.
KYC
This is the mandatory verification of the personal information of clients. As a confirmation of the personal information users can provide:
- Utility bills showed the address;
- passport;
- Driver’s license or ID.
In this case, the user will have to take a picture of himself and upload the pictures to the platform.
Without the completion of KYC, clients of regulated centralized crypto exchanges will not be able to use the platform's core functions.
Within the framework of this safety standard, Customer Due Diligence (DD) can be carried out - a comprehensive verification of users. This is an additional review of the client's biography in order to identify the participation in financial fraud. This review is performed after verification is complete.
Also, KYC rules imply constant monitoring. It includes:
- periodic verification of the data specified during verification;
- identifying suspicious transactions and their review.
If, as a result of constant monitoring, the traces of illegal financial activity have been identified, the account may be suspended. The site is obliged to transfer the data of such a user to law enforcement or regulatory authorities.
AML
It is a comprehensive anti-money laundering program. KYC requirements are an integral part of it.
AML includes a whole set of different regulatory processes designed to prevent financial crime such as:
- Monitoring of the suspicious activity;
- Documents review;
- Monitoring Software.
It includes a KYC procedure.
All of these tools have been created and implemented by government regulators. Their goal is to monitor all financial transactions and identify violations of the law in this segment.
Despite the increased level of security through the use of AML procedures, many members of the crypto community are unhappy with these measures. The main complaint comes down to a violation of the principle of decentralization. People do not like the fact that the system, which was originally intended to be outside the control of the government, is now trying to control the market.
Is the verification really necessary?
The fact that the user agreed to provide his personal data indicates that there is no intent to perform illegal transactions.
You need to understand that financial regulators pay a lot of attention to the topic of crimes that are associated with money laundering and theft of funds on the network. For this reason, they do not ignore the topic of the level of protection of various platforms that provide services as the exchange and sale of cryptocurrency.
If the exchange supports KYC and AML standards, then there will be significantly fewer questions from regulators. The introduction of mandatory verification, in general, leads to the legalization of the crypto industry in different countries. From this perspective, such requirements from the exchanges are a good thing.
More control means fewer opportunities for fraudsters. Fewer risks - regulators are happy and do not interfere with the development of exchanges.
Both for numerous clients of crypto platforms and for the platforms themselves, mandatory verification is beneficial for several reasons:
- Enhanced user security. The more reliable the project, the higher the rating. More users will come to an exchange with a reputation for being an extremely reliable platform.
- Ensuring investment security. Clients of exchanges receive protection from fraudsters and any illegal schemes. As a result, they will be open to deposit large amounts into the account.
- Exchanges complying with international regulators will help popularize cryptocurrencies. Regular users, seeing a high level of protection and legality of operations, will quickly get used to the crypto segment.
When services comply with international regulations, they can count on stable operation - without interference from the government. As a result, users from different countries will have access to a large number of reliable financial systems.
At the same time, one problem remains unresolved: verification neutralizes anonymity - one of the key advantages of cryptocurrencies. Many have used bitcoin because of the ability to conduct transactions without revealing their personal data. The only way out for those who value anonymity is to look for other opportunities, bypassing cryptocurrency exchanges.
Authorities Point of View
Governments have always been and will be against anonymity because unidentified transactions cannot be controlled. Unmonitored financing can lead to various forms of damage. Such as financing of socially dangerous groups and events. Also, anonymous transactions allow people to avoid paying taxes.
For these reasons, the authorities will always try to enforce various tools to control services related to the profit, purchase, and exchange of cryptocurrency.
So, it will not be possible to get away from verification on exchanges. The user faces only two choices. Either disclosing your data and gaining access to all the capabilities of the platform or not using exchanges at all.
Risks associated with the refusal of complete verification
Verification is not the obvious choice for all users. Many people need exchanges for various operations with cryptocurrency, but mandatory verification causes negative emotions. If refusing the services of crypto platforms is a painful decision, then it makes sense to sacrifice anonymity. Working on various platforms without confirming your identity is a risky activity.
Difficulty in obtaining compensation in case of bankruptcy and theft of the assets
The Dutch company Crystal Blockchain specializes in the development of security systems for the crypto segment. According to their research, in the period from 2011 to 2020. Scammers and hackers were able to steal $ 7.7 billion in assets.
Thousands of users were affected, and numerous legal proceedings were initiated to obtain compensation. Some of them dragged on for years. One of the reasons is the absence of the KYC procedure on crypto platforms or the refusal of customers to complete KYC.
Without identity confirmation, it will be difficult for the clients of the exchanges to prove that they were the ones who lost money due to the hacking of the site. Sometimes the exchanges go bankrupt or change hands. In this situation, users who have fully passed the verification will have significantly more chances to receive compensation.
The issue with the conversion rate
There are unregulated exchanges that do not require KYC. These services partner with unverified third-party providers to withdraw cryptocurrencies to clients' fiat accounts.
When working with such exchanges, many of the terms remain unknown. As a result, any problems with the transfer of funds may arise - an inflated exchange rate, a delay in payment, or simply no payment at all.
Regulated exchanges that require KYC to partner with the legal banking system. Such a scheme of work significantly reduces the risks of losing money and improves the quality of customer service of the exchanges.
Freezing of suspicious assets
There is always a risk that the coins received during the exchange were previously used in any illegal activity. Such crypto-assets are called "dirty".
There are special services that allow you to check the received coins are clean. But no one guarantees the full accuracy of the analysis. If the exchange has doubts about the legitimacy of digital money transferred to the account of an individual user, it can block these funds.
To unfreeze the account, you will need to verify your identity and indicate the source from which the suspicious crypto money came. If verification is refused, the unlocking procedure will be delayed indefinitely. As a result, it is beneficial for those who plan to work with exchanges to complete the identity verification procedure.
Cons of required verification
The effectiveness of security tools such as KYC and AML largely depends on how quickly service providers receive information about suspicious activity. It is important that the exchange quickly identifies those verified users who have signs of fraudulent activity.
A centralized cryptocurrency platform may have difficulties due to the excessive desire of supervisors to control everything. If a regulated exchange fails to notify the regulators about fraudsters or does so with a delay, then its accounts may be frozen. This happened, for example, in India.
Regulatory authorities sometimes show unreasonably harsh reactions. And if the accounts of the exchange are suddenly frozen, then the activity of its clients will also be paralyzed.
Violation of the Crypto community Values
One of the core values of the blockchain is anonymous transactions. Millions of users started working with cryptocurrency due to the ability to transfer funds anywhere in the world without revealing their identities.
The introduction of mandatory verification completely neutralizes this advantage within the framework of the centralized exchange. Under such conditions of working with cryptocurrency, the idea of freedom of movement of financial flows, their privacy, and anonymity is gone. Mandatory verification is a procedure that violates the core values of the crypto community.
With the help of KYC and AML, government agencies can control the flow of digital money. If necessary, even apply different levels of pressure both on the platforms and on their customers. The exchanges themselves can also freeze clients' funds if any suspicions arise. Even after passing full verification.
On one of the major platforms, there was a case when the user's coins were blocked. The reason is the receipt of digital money from a suspicious source. The exchange demanded the entire chain of transactions associated with this source, in chronological order. Moreover, each step had to be confirmed with screenshots. That is, the user had to report on cryptocurrency transactions outside the exchange.
The bottom line is that there is always a risk that centralized platforms are using KYC to freeze funds for individual clients. For this reason, you need to carefully consider the reputation of the exchange before registering and transferring coins to its account.
Does it make sense to fight for anonymity?
To keep personal data privacy is one of the main reasons for refusal to go through full verification. But the risks posed by the disclosure of such information are mainly associated with attracting the attention of the tax regulators.
If you are an honest person, then in most cases there will be no problems. Those who just want to exchange cryptocurrency should pay attention to P2P platforms without mandatory verification.
Users wishing to work with various digital assets will have to opt for large exchanges. At the same time, clients of reliable TOP platforms will not receive any damage from the disclosure of personal data. Government authorities, if they wish, will be able to find out exactly who has withdrawn certain amounts from an account on a cryptocurrency exchange. This is where the discomfort ends.
With mandatory and complete verification, the reliability of the exchange is significantly increased. Most clients always want everything to be in legal order when it comes to their money. Plus, you need to realize the fact that government agencies will still seek the degree of control that they need. So working with large digital assets and remaining anonymous will not work.
The fight against anonymity in the crypto segment is taking place in different countries, so this is a global process. You can be displeased with them, but you won't be able to stop them.
For various operations within the country, banks will launch a digital equivalent of the national currency. Bitcoin and other coins that allow making transfers without disclosing identity will be pushed out by the regulators. It will be possible to trade them on any platform only by completing the verification.
It is necessary to recognize this fact as inevitable and draw up a strategy for working with cryptocurrency taking into account these circumstances. In fact, there is nothing wrong with losing anonymity. This is confirmed by the experience of many traders working in the foreign exchange and stock market. Large and reliable brokers always ask clients during registration to provide documents proving identity and even place of residence. This is normal practice.
Security of the personal information
Many are worried about the problem of identity theft after being verified on a cryptocurrency exchange. Leaking scans of passports and photos of clients are dangerous because they can be used to obtain loans and other transactions.
For this reason, you only need to choose large exchanges with a good reputation and serious volume. Platforms with a large number of affluent clients invest a lot of resources in security technologies. If the exchange is not in the TOP, there is a risk that the level of its security will be weak.
When choosing a crypto platform, you need to check for the following levels of protection:
own separate servers for storing personal data of clients;
using encryption of information on servers;
providing access to data only to a certified AML officer and partially to employees of the KYC service.
If the information is stored on different servers, then each of them will have to be hacked. As a result, it will not be possible to immediately access the entire database. This kind of hacking is extremely difficult since the servers on the major exchanges are encrypted. Plus, all copies of documents received from users are watermarked. They block the use of copies outside the exchange.
As a result, against the background of the inevitable loss of anonymity, large regulated platforms will be one of the best options for trading cryptocurrency.
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