Cryptocurrency is based on a completely decentralized technology with no central authority. As a result, the adoption of cryptocurrency and blockchain technology has grown exponentially, addressing the central authority in the financial industry. However, since cryptocurrency transactions are cryptographically secured on their blockchains and typically happen instantly and anonymously, criminals frequently use this to circumvent anti-money laundering (AML) laws.

Cryptocurrencies can be a top target for criminals for unlawful activities like money laundering and funding terrorism due to the anonymity of transactions and seamless cross-border payment capability. However, users must undergo a KYC verification process to prevent criminal activity and other illegal technology before using custodial exchanges.

What is KYC?

KYC is an acronym for 'Know Your Customer,' It is the term used in the conventional financial system to describe a set of regulations that financial institutions must adhere to confirm the identity of anyone holding a bank account, whether they are an individual or a corporate body. Similarly, in cryptocurrency, KYC refers to the obligation of the crypto exchange to conduct individual identity and background checks on its users before allowing them to access its product or platform. It is part of a more extensive set of measures used by regulators worldwide to reduce suspicious activity and combat money laundering.

Some exchanges may allow you to open an account without completing the KYC process, but the account will be restricted until you verify your identity. As a result, you may be unable to conduct trades or be limited to a certain amount to deposit until the process is completed.

How Does KYC Work?

The way various cryptocurrency exchanges handle their KYC process may vary. However, they all have the same purpose, and the requirements are closely similar. As a result, you will have to provide the cryptocurrency exchange with some vital information. Thus, to comply with KYC, cryptocurrency exchanges must take the following actions:

Identify the user

Exchanges will require the user to provide personal information, such as their full name, residential address, and date of birth, upon signing up. This is usually the first step in the KYC process.

Verify the user

The exchange will verify the user's information by comparing it to the user's official documents, such as a passport, state-issued driver's license, proof of address, utility bill, or any other verifiable document containing the user's information.

After completing all necessary verification, the user can access the platform's products and services. However, some exchanges require enhanced verification processes, which require the user to take a selfie picture holding the valid document provided and some additional information that will ensure the legitimacy of the user.

Benefit of KYC

Increased user transparency and trust

User identity verification increases transparency and customer trust. Users are more likely to continue using a cryptocurrency exchange if they believe the exchange is taking proactive and preventive measures to safeguard their accounts.

Scams like money laundering are less likely to happen.

With the KYC verification, a user will be under restriction to carry out illegal transactions because their background information and comprehensive identity check are in the custody of the exchange. This can improve market reputation and drastically reduce the possibility of scams.

Greater market stability

Anonymous transactions in the market contribute to the erratic behavior of price fluctuation. However, the market's overall stability and value growth are aided by KYC programs that offer more comprehensive identity verification. Also, by exhibiting active risk assessment on the part of exchanges, KYC programs help to stabilize the market by creating greater user confidence.

Why is KYC Important for Crypto Exchange?

A cryptocurrency exchange can conduct background checks using KYC information to determine whether a user will likely use their wallet for illicit purposes. As a result, the significant need for KYC is to detect suspicious behavior as soon as possible because the cryptocurrency exchange may be held liable if a user gets away with committing a crime because they failed to do their due diligence.

Furthermore, imposing KYC compliance could aid in combating criminal activity outside the realm of cryptocurrencies. For example, one illegal activity made possible by pseudonymous transactions is "ransomware," which extorts money by locking down a person's computer network, such as cyberattacks that prevent users from accessing computers or networks until a transaction is made.

Once the KYC process is completed during registration, there will be no need for additional verification, and combining this with 2FA authentication will ultimately secure the account. The disadvantage of the KYC process is that it may take a long time to complete. Some transactions can take days, if not weeks, to verify all of your information.

Create a Cwallet Account without KYC verification

Cwallet is an interactive cryptocurrency wallet used to buy, sell, and swap your cryptocurrency. It has numerous features, such as storing your coins, swapping, tipping, airdrops, and earning money on the go while also supporting the crypto-economy via social networking. In addition, you can swap between 800+ cryptocurrencies present on Cwallet.

Whether performing a cross-chain swap or an "on-chain swap," Cwallet offers the lowest possible transaction fees. In addition, you can swap various currencies within your wallet for absolutely free!

What's more? Unlike other Custodial wallet providers, you don't need KYC Verification to operate an account with Cwallet; your email address is all you need to register. We'll manage the rest from there.

Easy, right? So, why wait? Get a free Cwallet and enjoy fast, simple, cheap, and easy access to crypto, with zero extra fees on all services. Even if you have no money, you can interact with our community members to get free crypto assets from tips and airdrops.

The Takeaway

As the adoption and volume of cryptocurrency transactions grow, centralized exchanges will continue to require KYC verification. However, if you need to execute transactions anonymously and in a peer-to-peer network, decentralized exchanges are the ideal platform. Decentralized exchanges (DEXs) do not require a KYC process, as trades are executed and conducted through smart contracts rather than a central trading desk. As a result, users are not required to reveal their identities.