Could KYC Checks on Exchanges Pose Risks for Long-Term Investors?
The issue of whether or not to introduce KYC checks in the crypto scene has been a long debate. For some crypto enthusiasts, the scene has become flooded with hackers and scammers, giving rise to the need for KYC and AML checks. For others, these checks erase the core feature of digital currencies, which is the decentralized nature and the anonymity on the blockchain.
As more people get into the cryptocurrency scene, the interference of governments and financial regulators continues to be felt. In the past year, countries such as the US and the UK have enforced some regulations on crypto use. Although many people welcome the assurance that these checks provide, some skeptics mention that they could do more harm than good.
Is there some truth to these claims? Could KYC checks pose some risks to long-term risks to crypto investors? In this article, we will delve deeper into the topic and try to determine whether or not KYC checks are necessary in the crypto space.
The Need for KYC Checks in Crypto Spaces
During the infant years of cryptocurrencies, governments and financial regulators steered away from the new technology. The main reason for this was that many did not know what regulations they needed to put in place. As such, cryptocurrencies remained mostly unregulated, which for many enthusiasts, was an excellent opportunity to stay anonymous.
However, as people got to know more about the digital currencies, one thing that stuck out was that transactions on the blockchain were not entirely anonymous. Anyone who knew how blockchains worked could easily bypass the system and obtain wallet addresses, as well as IP addresses of those on the blockchain. Thus, the privacy and anonymity became compromised, leaving the scene open to hackers and other malicious users.
The issue of hacker attacks in the crypto scene has been a significant concern. The first attack dates back to June 2011. A member of the BitcoinTalk forums, Allinvain, was the first person to suffer a substantial Bitcoin loss after 25,000 BTC were stolen from their wallet. The attack came after hackers got hold of the Windows computer that he was using and compromised his wallet.
Since then, hacker attacks have only been on the rise. In 2019, 11 major crypto exchanges suffered from such attacks, recording losses of $283 million worth of cryptos. This figure makes 2019 the worst in the history of crypto attacks.
It is because of this and other attacks that financial regulators felt the need to come into the scene. FinCen, for example, put in place specific measures to regulate the use of cryptocurrencies in the US. The UK has FAC regulations in place on the guidance of crypto tokens. As more regulators get into the scene, one of the features they are advocating for the most is KYC checks. Bitmain, for example, made KYC mandatory in 2018. Therefore, miners have to complete the check beforehand. But critics argue that these checks will do more harm than good. Could they be right?
The Risks of KYC Checks on Crypto Investors
We cannot deny that these checks have some positive impact on the industry. One of the most significant ones is the regulation of ICOs. By including KYC checks, more investors are confident in the projects, which brings more of them on board.
On the other hand, however, these checks pose significant risks. To understand these risks, we must first understand how KYC checks work.
When completing a KYC check, crypto investors have to give personal information. This includes details such as their names, photo IDs, addresses, and any other information that the regulator may require. All this information helps the exchanges to verify that the investors on the exchanges and ICOs are genuine people and not hackers. This information is stored in databases by the exchanges.
Now, picture this. Suppose there is a database attack. Hackers could gain all the information they would need on the crypto investors in that particular project. They would have access to their wallet addresses, their IP addresses, the amount in their wallets, their physical location, among others. With this information, they could do virtually what they want. They could steal digital assets from the wallets, or in extreme cases, follow the investors to their homes using their physical locations.
Earlier this year, Digitex announced that they would not be using KYC anymore. This move came after an ex-employee leaked KYC data of over 8000 customers. The data was held in a third-party KYC platform that the ex-employee had access to and used it to blackmail Digitex.
Exchange hacks happen all the time, and if the exchange has KYC data in storage, these hacks could lead to huge losses. The largest crypto exchange by trading volume, Binance, experienced a security breach in August 2019. The hacker reportedly gained access to a significant data set from the exchange’s KYC data. The hacker identified themself by Bnatov Platon and claimed that they had photo IDs of 10,000 users as part of the 60,000 pieces of KYC data. The hacker asked for 300 BTC in exchange for the information.
The risk of KYC checks goes beyond the exchanges and ICO projects. With everyone in the crypto scene advocating for the mass adoption of digital currencies, it won’t be long before we can use digital currencies in spaces that are less secure than exchanges. Say, for example, in the eCommerce scene. You decide to pay for some clothes using your digital currencies. In so doing, you leave a trail that could trace back to your wallet address. If, by any chance, a hacker got hold of the store’s data, they could use the information to trace back to your digital wallet, where you have all your coins stored. The results could be disastrous, seeing as they wouldn’t have to go to too much trouble to gain access to your wallet.
Author’s Note
It is quite evident that KYC checks pose particular risks to long-term investors. However, we cannot deny that these checks also come with certain advantages. Therefore, the question should be how investors can remain safe while transaction on the blockchains without limiting their anonymity.
Financial regulators are still learning however much they can about cryptocurrencies and their regulation. As such, we can only expect them to come up with more feasible solutions to the risks involved with KYC checks.