Are non-KYC crypto exchanges as secure as their KYC-compliant counterparts?

Many see implementing Know Your Customer (KYC) tools in crypto as a deterrent to the Bitcoin (BTC) standard, which has mainly promoted anonymized peer-to-peer transactions. However, regulators continue to promote KYC and anti-money laundering (AML) implementations as a means of ensuring investor safety and protection against financial fraud.

While most crypto exchanges have begun implementing regulatory recommendations to stay ahead of crypto’s mainstream adoption, investors still have the choice to choose crypto exchanges that promote greater anonymity by not imposing KYC processes. But does choosing the latter as an investor mean compromising on security?

A question of trust

Anonymity goes both ways in most cases. Owners of crypto exchanges running non-KYC (or non-compliant) operations often choose to remain anonymous to avoid legal scrutiny. As a result, investors must have a high degree of trust in the people responsible for running the exchange.

On the other hand, decentralized exchanges like dYdX use trustless protocols to establish a community-controlled trading platform. This in turn instills confidence in investors despite the fact that KYC is not mandated on the platform.

Therefore, monitoring the track record of the platform and the people running it becomes crucial when trading on non-KYC platforms.

Blockchain remembers forever

While the suits supporting traditional finance portray crypto as money laundering tools, illegal cryptocurrency transactions have consistently declined year over year. Despite the ease of using cryptocurrencies without KYC verification, a chain analysis study confirmed that only 0.15% of all crypto transactions in 2021 were linked to illegal activities.

Also, immutable blockchain records allow authorities to track down owners of the transactions, further deterring bad actors from using crypto – both KYC and non-KYC platforms – to fund their practices.

Blockchain’s permanent nature has allowed authorities around the world to hunt fraudsters, swindlers and money launderers for crimes they committed years ago.

Not your keys, not your coins

One of the biggest concerns when trading with crypto exchanges is the lack of control over the assets. Cryptocurrencies stored over crypto exchanges means handing over the private keys to the exchange.

Using unregulated crypto exchanges that do not promote any KYC requirements exposes investors to the risk of permanently losing their funds. While both types of exchanges – KYC-compliant and non-KYC-compliant – require investors to hand over their crypto assets to third parties, KYC-compliant exchanges create greater trust among investors and regulators.

The answer to the question ‘Are non-KYC crypto exchanges safe?’ lies in understanding the above nuances. KYC or not, crypto-investors remain equally vulnerable to the risks associated with external factors such as owner intentions and shady business practices, as well as lack of government support.

In addition, investing with a non-KYC crypto exchange comes with restrictions on the trading value, available tokens and other services offered by the provider.