Over the past few days, speculation around Binance, the world's largest cryptocurrency exchange, has grown as regulation concerns hit the exchange hard. With Know-your-customer (KYC) requirements are kicking hard on users on the exchange, most are transferring their assets to DEXes to enjoy anonymous trading. But is this the right solution?
According to a statement shared on their blog on Tuesday, users with 'basic account verification' will no longer be able to withdraw funds exceeding 0.06 BTC daily, the move aiming to curtail money laundering and illicit activities through the exchange. The directive kicks off immediately for any new users and will be effective for existing users come August 4th, 2021.
Binance is also closing down its derivatives products to users in Italy, Germany, and the Netherlands shortly after regulators from the three countries gave the exchange an ultimatum in offering their citizens crypto products.
Regulation and strict know-your-customer (KYC) requirements are growing trends across centralized exchanges as most fold to pressure from governments and global financial authorities.
The KYC question
The topic of KYC requirements has raised unending debates across the crypto field, Binance being the latest exchange to join the conversation. However, crypto enthusiasts (Satoshi included) argue that the main point of the industry is to become fully decentralized and anonymous with KYC requirements, especially on centralized exchanges, seen as a big burden to achieving it.
With heightened regulatory requirements on centralized exchanges, crypto heads are moving to decentralized exchanges, or DEXes, en mass where anybody can trade without identifying themselves.
While the arguments of trading anonymously go in line with the beliefs of Satoshi, at the current stage, crypto requires strong support from corporations, regulators, and governments to promote mass adoption. KYC requirements are needed for financial corporations and registered entities to participate in the decentralized ecosystem. Having these institutions in the field will take the idea of peer-to-peer trading on DEXes to the mainstream users - boosting overall participation in crypto.
A decentralized KYC solution
In an aim to find a middle ground between collecting users' KYC data and preserving privacy, Polkadex, a decentralized exchange built on Polkadot, offers a decentralized KYC process. Conventionally, users are required to fill in their details, provide IDs and proof of statements to register their KYC details.
Polkadex solution solves this by using "cryptographic proof instead of actual user's data to verify that the participant is not sanctioned by Anti Money Laundering or involved in other financial crimes," the platform's website states.
Polkadex aims to create a fully decentralized exchange that allows peer-to-peer exchanges in a trustless environment. It offers users high liquidity, lightning-fast transaction speed, and advanced trading features to boost high-frequency trading by bots. Having KYC requirements plays a big role in boosting overall user acquisition on the exchange and is a welcome destination for institutions who want to enter the DeFi space - and play by the regulators' rules.
Polkadex's decentralized KYC solution secures users' information on the blockchain using "proof of identity" meaning the data always remains in the users' wallets. No data can be shared with third parties without the consent of the owner - giving full control of their data and preventing data leaks or hacks.
Decentralized KYC is the future of crypto
As seen above, centralized and decentralized exchanges will be forced to adopt KYC measures in line with international regulations to encourage mass crypto adoption. Most institutions and financial corporations are wary of dipping their feet in the widely unregulated crypto industry or working with any crypto exchange that does not abide by international KYC requirements.
Adopting KYC is also a key solution to the loss and fraud activities that occur in crypto. Losing your tokens to a registered wallet is much easier to track than an unregistered/ anonymous wallet.
Money laundering lets criminals hide the illegal origin of their money - crimes that hurt our citizens.— Mairead McGuinness (@McGuinnessEU) July 20, 2021
So we are getting tough on financial crime.
Today the @EU_Commission adopts measures against money laundering and terrorist financing. pic.twitter.com/UeZjD2Viki
Nonetheless, data privacy remains important but giving all relevant data to a centralized party does not bode well with crypto users. As such, the adoption of decentralized KYC solutions is important in providing a middle ground for crypto users and regulators. Crypto users give their cryptographic proof to only the exchange they need but remain in full control of their data.
The world of crypto is coming up with innovations to solves the question of KYC in the industry. Traditional methods of collecting KYC have failed across the crypto field and Binance's latest directive could see crypto traders and investors leave the platform in search of less stringent measures.
In order for the crypto gospel to reach far and wide, a clear KYC system needs to be adopted agreeable to the global financial regulators and one that preserves users' data privacy at all costs.