Know Your Peer — The pros and cons of KYC
KYC regulations originated from efforts to combat financial crime, starting with the US Bank Secrecy Act of 1970 and evolving through the USA PATRIOT Act and European AML Directives. These regulations have significantly impacted the crypto ecosystem, requiring centralized exchanges to implement ID checks, which some view as necessary for legitimacy and integration with traditional finance. However, critics argue that KYC is invasive, burdensome, and often ineffective against criminals while exposing users to data breaches. Alternatives like "Knowing Your Peer" are proposed, emphasizing peer-to-peer interactions in DeFi. Tools such as zero-knowledge proofs can validate attributes without compromising privacy. Reputation systems could enhance trust without mandatory identity checks. The hope is that self-regulation within crypto can demonstrate effective compliance methods, potentially leading to regulatory acceptance while avoiding the pitfalls of traditional KYC frameworks.
