Are non-KYC crypto exchanges as safe as their KYC-compliant peers?

Many see implementing Know Your Customer (KYC) tools in crypto as a deterrent to the Bitcoin (BTC) Standard, which has predominantly promoted anonymized peer-to-peer transactions. However, regulators stay put on promoting KYC and anti-money laundering (AML) implementations as a means to ensure investors’ safety and protection against financial fraud.

While most crypto exchanges have begun implementing regulatory recommendations to remain at the forefront of crypto’s mainstream adoption, investors still have the choice to opt for crypto exchanges that promote greater anonymity by not imposing KYC processes. But does opting for the latter as an investor mean compromising on safety?

A matter 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 level of trust in the people responsible for running the exchange.

On the other hand, decentralized exchanges such as dYdX use trustless protocols for establishing a community-controlled trading platform. This, in turn, instills trust within investors despite no mandate of KYC on the platform.

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

Blockchain remembers forever

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

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

The permanent nature of blockchain has allowed authorities across the world to hunt down scammers, fraudsters and launderers of crimes they committed years ago.

Not your keys, not your coins

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

Using unvetted crypto exchanges that market no KYC requirements exposes investors to the risks of permanently losing their funds. While both types of exchanges — compliant and non-compliant to KYC — require investors to hand over their crypto assets to third parties, KYC-compliant exchanges instill greater trust among investors and regulators.

The answer to the question ‘Are non-KYC crypto exchanges safe?’ lies in understanding the abovementioned nuances. KYC or not, crypto investors remain equally vulnerable to the risks related to external factors such as the intent of the owner and shady business practices, in addition to getting no backing from the government.

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