KYC

Regulatory process verifying user identities to prevent illicit activities, mandatory on centralized exchanges but optional in DeFi.

What is KYC?

KYC, or Know Your Customer, refers to a set of procedures that centralized digital asset exchanges (CEXs) implement to confirm the identity of their users before allowing them to trade, deposit, or withdraw digital assets. Mandated by global financial regulations, such as those set by the Financial Action Task Force (FATF) and local authorities, KYC ensures compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) laws. On a CEX, KYC typically involves users submitting personal information, such as government-issued identification (e.g., passport, driver’s license), proof of address (e.g., utility bill), and sometimes a selfie or biometric data.

The process helps CEXs mitigate risks by ensuring that users are who they claim to be, preventing activities like identity theft, fraud, or the use of platforms for illicit transactions. For example, major CEXs like Binance, Coinbase, and Kraken require KYC for most account functionalities, such as higher withdrawal limits or access to advanced trading features. While KYC enhances security and regulatory compliance, some users criticize it for reducing privacy, as it requires sharing sensitive personal data with the exchange.