Know Your Customer (KYC) inquisition is often viewed as a necessary evil that helps keep criminals at bay in the cryptocurrency sector. However, the inconvenience and cost caused by this regulatory burden is practically choking out crypto’s primary utilities and efficiency.
A recent video on Reddit highlighted the shortcomings of KYC, with one user claiming that the measures achieve very little in curtailing illicit activity while exposing customers to identity theft.
Businesses also incur crippling costs for imposing KYC, which the forum dubbed “Kill Your Customers.” One Redditor agreed with that assessment, noting:
“KYC only makes sense where there are loan or insurance contracts, for any other circumstance, like say depositing funds into an exchange where you can trade your money for stuff, it just opens you up to identity fraud for nothing.”
There is constant pressure from the Financial Action Task Force (FATF) for the digital assets space to adhere to stringent compliance operations. These measures are slowly constricting crypto businesses’ ability to serve their customers while causing heightened privacy invasion levels.
The True Cost of KYC Compliance
KYC-AML rules may have some benefits in curtailing money laundering and terrorist funding. However, the rise of powerful centralized agencies such as the Financial Crimes Enforcement Network (FinCEN) has led to the creation of often counterproductive models for an international monitoring system.
These AML-KYC restrictions foster financial exclusion and inequity in the global economy while developing a menacing and far reaching surveillance system.
According to a 2019 LexisNexis survey conducted in the US and Canada, small businesses are hit hardest by strict KYC restrictions imposed by regulatory bodies like FATF. What’s worse, tax agencies such as the IRS have ramped up efforts to monitor crypto users, demanding payment of taxes in the absence of clear regulatory guidelines for the industry.
Privacy issues aside, this heavy-handed approach threatens to stifle innovation in the nascent digital assets space and derail the widespread adoption of cryptocurrencies.
A New Regulatory Approach Is Needed
The rise of decentralized digital assets such as bitcoin has facilitated peer-to-peer online payments without the need for intermediaries.
This technology has terrified law enforcement, who see digital assets as prone to abuse by criminal elements. That is why the FATF recently introduced the “travel rule” that targets custodial crypto exchanges, essentially roping the industry into a massive surveillance system.
However, financial watchdogs’ efforts to impose strict identification requirements on everyone who uses cryptographic technologies could be a waste of resources. Moreover, the strategy has so far done little to stop bad actors from moving funds around.
A more measured, open-minded approach from regulators toward virtual currencies could enable them to manage inherent risks in the space without imposing blanket identity requirements on all crypto users.