Many see the implementation of Know Your Customer (KYC) tools in cryptocurrencies as a deterrent to the Bitcoin (BTC) standard, which has predominantly promoted anonymous peer-to-peer transactions. However, regulators continue to promote KYC and Anti-Money Laundering (AML) implementations as a means of ensuring investor safety and protection against financial fraud.
While most cryptocurrency exchanges have begun to implement regulatory recommendations to stay at the forefront of traditional cryptocurrency adoption, investors still have the option to opt for cryptocurrency exchanges that promote greater anonymity by not enforcing KYC processes. But does opting for the latter as an investor mean compromising security?
A question of trust
Anonymity in most cases goes both ways. Cryptocurrency exchange owners who perform non-KYC (or non-compliant) trades often choose to remain anonymous to avoid legal scrutiny. Consequently, investors need to have a high level of trust in the people responsible for running the exchange.
On the other hand, decentralized exchanges like dYdX use trustless protocols to create a community controlled trading platform. This, in turn, instills investor confidence despite no KYC mandate on the platform.
Therefore, monitoring the track record of the platform and the people who manage it becomes crucial when trading on non-KYC platforms.
Blockchain remembers forever
While the suits supporting traditional finance portray cryptocurrencies as money laundering tools, illicit cryptocurrency transactions have steadily declined year after year. Despite the ease of use of cryptocurrencies without KYC verification, a Chainalysis study confirmed that only 0.15% of all crypto transactions in 2021 were related to illegal activities.
Additionally, immutable blockchain records allow authorities to trace the owners of transactions, further discouraging attackers from using cryptocurrencies, both KYC and non-KYC platforms, to fund their practices.
The permanent nature of the blockchain has allowed authorities around the world to hunt down scammers, scammers, and money launderers they committed years ago.
Not your keys, not your coins
One of the biggest concerns when dealing with cryptocurrency exchanges is the lack of control over the assets. Cryptocurrencies stored on cryptocurrency exchanges mean handing over the private keys to the exchange.
Using uncontrolled cryptocurrency exchanges that do not market KYC requirements exposes investors to the risk of permanently losing their funds. While both types of KYC compliant and non-compliant exchanges require investors to divest their crypto assets to third parties, KYC compliant exchanges instill greater trust between investors and regulators.
The answer to the question “Are non-KYC cryptocurrency exchanges safe?” lies in understanding the aforementioned nuances. KYC or not, cryptocurrency investors remain equally vulnerable to risks related to external factors such as owner intent and shady business practices, as well as not getting any government support.
Additionally, investing with a non-KYC cryptocurrency exchange involves limitations on the exchange value, available tokens and other services offered by the provider.