Why is KYC the 'silent enemy' of cryptocurrency users?

The recent data breach at Coinbase has highlighted a troubling issue that many in the cryptocurrency industry want to avoid: the structural fragility of the mandatory identity verification systems (KYC) on centralized platforms. This incident not only exposed the personal information of 70,000 users but also sparked a debate about the compatibility of KYC and other regulatory measures inherited from traditional finance with the decentralized principles of cryptocurrency.

KYC: A mechanism built for a distinct environment

The KYC process originated in the 1970s under the regulations of banks in the United States and was reinforced after the September 11 terrorist attacks through the USA PATRIOT Act. The main purpose of KYC is to prevent the use of financial services for money laundering and financing illegal activities. However, when KYC is applied to the cryptocurrency industry, structural tensions and incompatibilities between these two worlds begin to become apparent.

Unlike traditional banks, where sensitive information is stored and protected by rigorously audited organizations, the cryptocurrency ecosystem is diverse and decentralized, with many operating groups and inconsistent security standards. This difference makes identification verification a gateway not only for legitimate users but also a target for fraudsters, extortionists, and cybercriminals.

When identification verification becomes a threat

The incident with Coinbase clearly illustrates this danger. Coinbase's customer support staff were bribed to provide important personal data. This is not a technical flaw in the infrastructure, but rather a human error in a system that already has vulnerabilities. It shows that concentrating a large amount of personal data in a single point can become a serious security threat to users.

For investors, the consequences of this incident go far beyond financial risks. The leak of information such as home addresses, personal ID numbers, and verification methods can lead to identity theft, phishing attacks, and even physical risks. In a market where users must protect their assets themselves, such incidents create new dangers that have never been encountered before.

The Paradox of Regulations in the Decentralized World

The core issue lies in the fact that current KYC processes are still operating based on Web2 logic while cryptocurrency is built on a decentralized platform (Web3). Centralized exchanges, required to comply with existing legal regulations, ask users to provide passports, selfies, and documents to prove their addresses. Once collected, this data becomes an attractive target for malicious actors.

Although KYC is applied with the goal of preventing illegal activities, the reality proves that this process is not truly effective in preventing crime. Attackers can use fake documents created by AI or purchase identities on dark web markets, rendering control measures ineffective. Meanwhile, legitimate users face the loss of privacy and personal security.

Alternatives to KYC

However, not all hope is lost. New technologies like proof of knowledge are opening up a new direction, allowing for identification verification without the need to disclose sensitive data. These technologies can combine privacy with compliance with regulations. However, the widespread implementation of these solutions still faces many challenges in terms of cost, technical aspects, and scale, making them not yet applicable on a large scale in the cryptocurrency industry.

While waiting for viable alternative solutions, investors are currently facing an ecosystem where protective mechanisms, instead of safeguarding them, expose them to unforeseen risks. The data leak from Coinbase is not the only incident, and without improvements in security and regulation, many similar incidents will occur in the future. Personal data will continue to be stored in centralized databases, which are vulnerable to attacks, while regulators continue to demand the implementation of an identification verification model designed for the traditional banking era in the cryptocurrency world.

Overall, the KYC process in the crypto industry today is an underestimated risk for users. Although the goal of KYC is to protect the system from illegal activities, in reality, it puts users in a more dangerous situation. They not only face security threats but also have to sacrifice personal privacy in an ecosystem that is expected to protect them from these risks.

While alternative KYC solutions have not yet been widely implemented, requiring cryptocurrency platforms to adopt a security model that does not align with their nature only creates more problems rather than solving them. The debate is no longer just about whether these activities are necessary, but about how and when they will be replaced by frameworks that truly fit the decentralized world of cryptocurrency.

Lilly