KYC in Cryptocurrency Transactions: From Legal Requirements to User Protection

When entering the world of cryptocurrency, you will definitely encounter the term KYC (Know Your Customer). But what exactly is KYC, and why has it become an indispensable requirement on all reputable exchanges? The answer lies in the battle between digital privacy and social responsibility in modern finance.

What is KYC and why has it become mandatory in the crypto industry

Cryptocurrency was created primarily to provide an anonymous, decentralized payment system, freeing users from the control of traditional financial institutions. However, this very nature has become a vulnerability exploited by malicious actors for illicit purposes.

In 2023, the transaction value from illegal addresses reached $24.2 billion—a concerning figure indicating a high level of abuse. From money laundering, scams, illegal trade, to terrorist financing, cryptocurrencies have been systematically exploited by criminal organizations. As a result, global regulatory agencies have been compelled to intervene.

KYC emerged as an urgent solution: verifying user identities to screen out high-risk individuals. Since 2020, the U.S. Financial Crimes Enforcement Network (FinCEN) has mandated all cryptocurrency exchanges to comply with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations, with KYC being the most critical step. Following suit, other countries around the world have adopted similar standards. Currently, KYC is mandatory for most legitimate centralized exchanges (CEX), although non-custodial wallets still maintain anonymity.

Three core benefits of KYC for users and the market

Enhancing trust within the crypto community

When an exchange implements strict KYC procedures, it sends a clear message: “We do not cover up criminals.” This creates a more transparent market where users feel confident about the credibility of those around them. As a result, users are more willing to invest long-term, and exchanges attract more honest customers.

Reducing crime and improving safety

Statistics provide the clearest evidence. The illegal transaction rate in 2019 was 1.9%—the highest between 2017 and 2022. However, immediately after KYC regulations were enforced, this rate dropped to 0.43% in 2020 and continued to decline to 0.34% in 2023.

Even more impressive are the illegal revenue figures: in 2023, revenue from cryptocurrency scams decreased by 29.2%, and hacking incidents dropped by 54.3%. This clearly demonstrates that KYC not only prevents crime but also reduces the incentives for malicious actors operating in this space.

Market stability and price manipulation prevention

The crypto market has experienced thousands of pump-and-dump schemes on DEXs—where anyone can add liquidity without identity verification. With KYC enforcement, those attempting to manipulate prices face higher risks. This barrier helps eliminate many wash trading and manipulation activities, creating a more stable trading environment. This not only protects individual investors but also fosters sustainable long-term growth for the crypto industry.

Identity verification process: Common standards for legitimate exchanges

Although details may vary by region, most reputable CEX platforms follow a three-tiered KYC process: basic, intermediate, and advanced.

Step 1: Basic identity verification

Users must provide government-issued identification documents (passport, ID card, driver’s license, etc.). Photos or scans of these documents are stored and verified.

Step 2: Face verification

To ensure the user is the actual owner of the document, exchanges require a selfie or a short video comparison with the photo on the ID. This step helps prevent account sharing or using someone else’s documents.

Step 3: Enhanced risk assessment

The system cross-checks user information against global databases (e.g., World-Check Risk Intelligence) to determine if the individual is linked to politically exposed persons (PEPs), listed on sanctions lists, or has a history of money laundering.

Proof of address (if needed)

In some regions, users must provide proof of a legitimate address (utility bills, property documents, etc.). Others only need to provide this information if they wish to increase withdrawal limits.

The entire process can take from a few minutes to several hours depending on system status and the completeness of the documents provided. Once KYC is approved, users gain full access to all trading features.

KYC is not a burden but a protection: Advice for traders

For individual traders, completing KYC is not only about legal compliance but also about proactively protecting oneself. When you complete KYC on a reputable platform:

• Your assets are legally protected: If the exchange encounters issues, you have legal grounds to seek compensation.
• Reduced risk of dealing with criminals: You avoid inadvertently supporting illegal activities.
• Higher withdrawal limits and benefits: Completing KYC allows higher withdrawal caps and larger trading volumes.
• Peace of mind for the future: As the crypto industry matures, those who have completed KYC will face fewer issues in legitimizing their assets.

In summary, KYC is an integral part of modern cryptocurrency trading. It requires sharing personal information, but in return, provides a safer, more transparent, and sustainable trading environment. Reputable exchanges commit to protecting your KYC data with the highest international security standards, allowing you to trade without worry.