One of the main complaints against investors in cryptocurrencies, as well as against crypto exchanges from the regulators, is that the KYC (Know-Your-Customer) procedure is often violated. That is, it is often unclear to the authorities who is hiding behind a Bitcoin address or a digital wallet. And if in the case of the oldest cryptocurrency, at least according to the U.S. regulators, it is still possible to figure out who is sending the funds, then there are serious concerns about the blockchains of other cryptocurrencies—namely that it will not be possible to verify the transaction participants. The fact is that storing information on the blockchain constitutes a “national threat” to U.S. interests, as said by former CIA officer Andrew Bustamante. But just how rational is requiring the cryptocurrency community to comply with KYC?
Filling All the Papers of the Regulators Is Tantamount to Stopping the Work of the Exchange
On April 18, 2018, Jesse Powell, one of the founders of the Kraken crypto exchange, sharply criticized the demands of the New York authorities to fill out a “regular questionnaire” about the platform’s clientele. He explained that if one carries out everything they have to within the framework of the KYC, then trade in cryptocurrencies can be paralyzed altogether. This did not help, as last year, Kraken was faced with the need to answer on average nine inquiries from 11 U.S. regulatory agencies a week, which is almost three times more than in 2017 and 6.7 times more than in 2016. Obviously, despite the desire of crypto exchanges to work by the rules, they are faced with ever-growing demands. What is going on?
KYC Does Not Prevent the Appearance of Most Criminals in the Financial Market
The crypto activist Andreas Antonopoulos draws attention to the fact that modern financial market institutions, from banks to investment funds, already have so much sensitive information about customers that all of this can potentially be used against the users of financial services, including in violation of laws. How else can this “knowledge” be broadened? In addition, the KYC requirements seem meaningless, since the absolute majority of criminals initially had a crystal clear biography and committed criminal acts for the first time. The expert concludes that this is the wrong approach: “If I know you, then you are a good person, and if not, then you are suspicious and should be subject to some restrictions.” Antonopoulos believes that the life of a modern person is already wide open, that social networks, CCTV cameras, and mobile phones record information about people every step of the way, and transferring data to crypto exchanges is no different, so only decentralized cryptocurrency trading blockchain platforms can be in demand in the future.
Crypto Exchanges Stop Working All Too Often
The fact that crypto exchanges who own information about clients have a great temptation to use it for their own purposes was demonstrated by the preparation of cryptocurrency investors for the annual event that took place on January 3 for the first time, the Proof of Keys. On this day, cryptocurrency holders withdraw, at least temporarily, their crypto assets from crypto exchanges in order to check how much crypto the latter actually own out of what they show on the accounts of the users. How some centralized sites behaved, in this case, has become revealing. On January 2, it was reported that HitBTC was blocking withdrawals. Commenting on this, John McAfee urged everyone to leave HitBTC and other centralized sites and take advantage of decentralized solutions. After a failure in operation on January 3, the Bitfinex crypto exchange stated that it would undergo seven-hour maintenance on January 7, the fact which the head of Binance used to attract customers to his platform. But how is one crypto exchange fundamentally better than another?
The problem remains that crypto exchanges are increasingly looking like obsolete remnants of the past, like the classic NASDAQ or some bank. As Mati Greenspan noted, the absence of Bitfinex online for several hours is a decrease in liquidity on the market. In part, this is the same thing that happens in case of a 51% attack on the blockchain of a cryptocurrency as happened with Ethereum Classic on January 7. It is not clear now what the real price of such an altcoin is, something which Bitcoin enthusiast Saifedean Ammous paid attention to. And if interruptions occur for various reasons on a significant number of crypto exchanges, then how can we assume that the results of trading on them—used by the majority to track the dynamics of cryptocurrency prices and other basic market parameters—are fair? A special issue is the accession of crypto exchanges to U.S. sanctions against individual countries. Obviously, this strikes at the ability of millions of people to have access to the purchase and sale of cryptocurrencies, and a positive assessment of the possibilities of restricting the circulation of crypto coins for political reasons is excluded in the white paper of Bitcoin.
Crypto Exchanges and Banks: Same Ailment—Lack of Liquidity
Alas, the fact that problems can occur “quietly” is showed by a typical message from January 6: “Made a large deposit at the bank yesterday. Money not available to me until January 16th Just bought BTC on Coinbase. BTC not available to me until January 11th. Long story short… time to get rid of Coinbase.” What is particularly noteworthy is that the difficulties arose on January 6 just when the market dynamics revived, and the traders wanted to get access to their Bitcoins, which appreciably rose to $4,000. In addition, surprisingly, but the crypto exchange and the bank behaved similarly by collecting a substantial amount of information about customers, and in exchange, they cannot provide uninterrupted access to assets. And it is evident that today many crypto exchanges already work like banks. In case of a mass attempt of withdrawal of cryptocurrencies by clients, these sites will collapse, as if about 5% of bank depositors began to withdraw money from their accounts at once. And this order of things has existed for a long time, but it cannot suit us in the era of new financial technologies.
On social networks, people lament that over the ten years of Bitcoin’s existence, no stable crypto exchanges have appeared, and analyst Frank Chaparro poses the question whether a “big” cryptocurrency trading platform will ever rise from the cohort of current leaders or it will come from Wall Street. It seems that there will be a third option in the form of the development of decentralized platforms, and this will be born from the people’s demand.
Bakkt and CoinFLEX: Old Problems in a New Fashion
Working with centralized sites is a suspiciously imposed solution, for example, by CNBC. Alas, the proposals from the Bakkt and CoinFLEX seem to be suspiciously similar, as those crypto exchanges are “hellos” from the traditional market of finance to the crypto market. The latter frankly admits that it will allow trading with a leverage of 20x, which, according to expert Caitlin Long, means “the end of a true free-market price for Bitcoin.”
In the case of Bakkt, there is no evidence that they will keep their word and will not allow cryptocurrencies to be traded in volumes larger than they will buy cryptos under customer requirements. Meanwhile, both sites received carte blanche for promotion in the leading U.S. business media, which raises the question whether it is in the interests of the cryptocurrency community, considering how the U.S. SEC performs actions that do not contribute to the development of decentralized solutions. But, they are still successful, as according to the head of Binance, Changpeng Zhao, the volume of transactions using such solutions is at least equal to the size of transactions on centralized sites, but this is only part of the truth. According to the Tabb Group, the volume of transactions on decentralized sites is 2–3 times higher than the amount on crypto exchanges, and it is obvious that the latter are becoming more and more frustrated, and we are already witnessing the decline of such platforms. Large orders for the purchase of cryptocurrencies are migrating to the OTC market. This was talked about by Monica Summerville, director of research Tabb Group. Moreover, it is on the over-the-counter (OTC) market that there is already a significant increase in demand for cryptocurrencies compared to their supply with an excess of 60%, which one of the largest decentralized platforms reported on January 8.
The issue of compliance with KYC becomes a verdict not only for crypto exchanges, as it is impossible to issue an efficient central bank digital currency (CBDC) replacing cash with this approach. Also, a possible Facebook project to launch its own crypto money will face insurmountable difficulties.
The Modern World of Finance Does Not Ensure Protection against Hackers
Launching decentralized solutions from cryptocurrency sites also looks like an unnecessary palliative and an attempt to be in trend. But as Bitcoin exists without a management team, even on decentralized sites, if they are honest, their founders should repeat the path of Satoshi Nakamoto and leave forever both their projects and the public view in general. It is curious that the IMF could not fail to speak in favor of maintaining greater secrecy. “It is a way to avoid customer profiling—commercial use of personal information, for example, to charge higher mortgage rates to people who purchase alcohol. Another advantage of anonymity is limiting exposure to hacking. Moreover, anonymity is often associated with privacy—widely recognized as a human right.”
All this is confirmed by numerous facts. One of the world’s leading hotel chains admitted that it had “lost” the passport data of five million of its guests. All the information shared by the leading politicians of Germany with the banks and their opening of accounts fell into the hands of hackers at the beginning of January, a fact that was called a direct blow to democracy in this country. This situation will be repeated all the time until such information is securely stored on the blockchain, and transactions are carried out using cryptocurrencies in decentralized networks.