What Is KYC, and Why Do Crypto Exchanges Require It?

by Lyle Daly | Published on Sept. 29, 2021

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Before you can start crypto trading, you'll need to verify who you are.

When you set up an account with a crypto exchange, you'll typically be asked to go through the know-your-customer (KYC) process. This is a standard identity verification that major exchanges require for anyone who wants to trade crypto.

The sooner you complete KYC, the sooner you'll be able to make cryptocurrency purchases and withdrawals. In this guide, you'll find out exactly what KYC is, how the process works, and alternative ways to buy crypto.

What is KYC?

KYC, which is short for "know your customer" as well as "know your client," is the process of verifying a customer's identity. It's most common with financial institutions and financial service businesses, including banks, stock brokers, and now cryptocurrency exchanges.

The point of KYC is to confirm that a customer is who they claim to be and to prevent illegal activities, such as money laundering, funding terrorism, and tax evasion. If a crypto exchange doesn't perform KYC, then it could be liable for those kinds of illegal activities.

You may be able to create an exchange account without going through the KYC process, but your account will have restrictions until you verify your identity. The most likely restriction is the exchange simply not letting you deposit money or buy crypto. Or it could put a limit on the amount of money you're able to deposit.

How KYC works

Every crypto exchange handles KYC a bit differently. Here's the information you will typically need to provide during the KYC process:

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  • Date of birth
  • Social Security number
  • Physical address

In addition, exchanges also generally ask for a photo of valid government-issued identification. This can be a driver's license, state ID card, or a passport.

After you provide the requested information and a photo of your ID, the exchange will use that to verify your identity. This can take anywhere from minutes to several business days depending on the exchange and how busy it is.

There can be situations where a crypto exchange requires additional verification. In that case, you may need to provide proof of your physical address or a selfie.

Can you buy crypto without KYC?

You can buy crypto without KYC, but it's more complicated and potentially riskier than using an exchange that follows KYC regulations. The most common ways to buy crypto without verifying your identity are decentralized exchanges and Bitcoin ATMs.

A decentralized exchange is an exchange without a central organization governing it. There are two basic types of decentralized exchanges: Peer-to-peer marketplaces and automated market makers (AMMs).

Peer-to-peer marketplaces provide a platform for buyers and sellers to post cryptocurrency offers. It's like Craigslist for cryptocurrency. A couple of popular peer-to-peer marketplaces are:

  • Bisq
  • LocalBitcoins.com

Although those platforms have security measures to prevent fraud, there's still the possibility of getting scammed and losing money. Compared to centralized cryptocurrency exchanges, peer-to-peer marketplaces carry more risk.

AMMs let you trade pairs of cryptocurrencies, and they set their trade prices through smart contracts. They offer trading through liquidity pools, which are pools of user-contributed crypto funds. Popular AMMs include:

While AMMs don't require identity verification, you need to already have a crypto wallet with funds to trade. You can't buy crypto using cash on these platforms. Many users opt to buy crypto with cash on a centralized exchange first. Then, they transfer that to a crypto wallet and connect it to an AMM to have access to a wider selection of cryptocurrencies.

There are also Bitcoin ATMs all over the world. Despite the name, these aren't always limited to Bitcoin. Some offer other types of cryptocurrency. Although fees tend to be high, these ATMs let you buy crypto in cash.

A key part of crypto trading

KYC is a requirement you'll encounter on just about all centralized crypto exchanges. Buyers who prefer to stay anonymous have other options, namely peer-to-peer crypto marketplaces and Bitcoin ATMs.

However, those options tend to be less user-friendly than buying on a quality centralized exchange. They can also cost you more in transaction fees.

It's best to be prepared to go through the KYC process with an exchange you like. Fortunately, it's straightforward and doesn't take too long. Once you have it completed, you'll be able to buy crypto without issue.

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