It’s almost impossible to remain anonymous in the traditional financial world because banks and other financial institutions will always demand some form of identity before they do business with anyone. That’s in stark contrast to crypto and decentralized finance, where users interact via their wallets and never need to reveal anything about them.
But the crypto industry is coming under pressure to change, and it’s being put in an uncomfortable situation where it’s being asked to adhere to Know Your Customer and Anti-Money Laundering regulations. It’s a big headache for crypto because asking users to reveal their identities, clashes with the industry’s ideals of open access and user privacy.
Traditional banks and financial services providers have long ago implemented KYC and AML as a part of their security procedures. These processes are designed to gather information about who they’re dealing with and verify each customer’s identity before they onboard them. By doing so, the institution can assess the risk profile of each user. It’s an important step as it helps to prevent criminals and terrorists from depositing funds related to their illicit activities.
When crypto and DeFi first emerged, there were no obligations to adhere to KYC because the industry was completely unregulated. Digital assets were essentially the Wild West, a consequence of the crypto industry’s desire to remain decentralized and anonymous so it could be accessed by anyone. As such, most crypto exchanges and DeFi protocols didn’t know anything at all about their customers.
Decentralization is one of the founding principles of cryptocurrency. Its very premise lies in the concept of eliminating the centralized entities that dominate traditional finance.
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