Whitelisted Withdrawals: The Next Step in Crypto KYC Evolution

Where only a handful of platforms observed know your customer (KYC) verification, customer ID checks are now common on centralized exchanges. Indeed, the current crypto scene appears significantly changed from the “Wild West” era of times past.

KYC May Soon Include Whitelisted Addresses

Tweeting on Wednesday, Ari Paul, co-founder, and chief investment officer at blockchain asset management firm BlockTower Capital predicted that crypto exchanges will soon only allow withdrawals to approved addresses.

2/ All the biggest exchanges are racing to put in place processes to comply with financial regulation that requires this. They've recently been told that they're out of compliance. Question is when does enforcement start.

— Ari Paul ⛓️ (@AriDavidPaul) August 25, 2020

According to Paul, exchanges looking to operate within the law are currently developing modalities that will ultimately lead to this outcome. In effect, exchange users will see their addresses slowly resemble real-name bank accounts. With addresses tied to specific entities, the pseudonymous aspect of cryptocurrency transactions will likely suffer a significant impact. Regulated marketplaces may even maintain a registry of “blacklisted addresses” with protocols set up so that transactions involving these wallets raise immediate red-flags. Another possible implication is the establishment of a “clean coins – dirty coins” dichotomy. Entities operating within the margins may also emerge, offering corridors via which market participants can courier funds across the divide. While Paul’s conclusions are far from definitive, several changes within the regulated crypto space already support the BlockTower co-founder’s argument. In South Korea, for example, real-name crypto trading accounts are mandatory. Platforms can lose their licenses if they flout this order. Commercial banks even verify the compliance of the platform to this rule before renewing banking services.

Stricter Crypto KYC Laws

As previously reported by BeInCrypto, BitMEX is the latest crypto trading platform to adopt strict KYC checks. The move marked a significant change from the company’s policies regarding customer identification and a further indication of the impact of tougher regulations in the cryptocurrency space. Strict KYC compliance usually feeds into protocols aimed at combating money laundering. Indeed, it’s common to see anti-money laundering (AML) laws amended to include a country’s cryptocurrency industry. Earlier in August, Ireland’s cabinet passed new AML laws with exchanges and wallet providers featuring prominently in the bill. In the U.K., the country’s Financial Conduct Authority recently expanded its financial crimes reporting requirement to include cryptocurrency businesses. As these laws require even higher levels of compliance, trading activity may shift significantly towards decentralized exchange (DEX) platforms. Already, decentralized exchanges like Uniswap are seeing increasing volumes.