KYC regulations are required to comply with Anti-money Laundering rules in the exchange of cryptocurrencies. The surging increase in criminal activities, such as money laundering, is the reason for the need for a regulatory structure for DeFi. KYC works to prevent the rate of illegal activities by verifying customers’ identities.
What are KYC regulations?
KYC, an acronym for Know Your Customer or Know Your Client, is a series of procedures that financial institutions have implemented to confirm or attest to a customer’s identity. KYC is a scheme and the first stage in Anti-Money Laundering. It is used in financial institutions to know the level of risk associated with a customer. Simply put, they are standard regulations to reduce fraud in financial institutions. Compliance with KYC regulations has the potential to reduce difficulties in regulating and managing DeFi. The essential components of KYC include a customer identification program, a customer due diligence program, and continuous monitoring.
Also read : The Ultimate Guide to Defi Staking
How KYC regulations will impact the rise of DeFi
The following are some of the ways KYC regulations will influence the rise of DeFi:
• Reduction in legal risk:
KYC regulations will help in the removal of legal disputes in businesses. It helps cryptocurrency exchanges to stay ahead as legal prerequisites change.
• Increased customer trust:
Users of DeFi will be more interested in using the service, particularly if they are assured that cryptocurrency exchanges stay on top of their game in protecting and securing accounts.
• Increased Market Stability:
It is not uncommon for the cryptocurrency market to be unsafe due to its volatile nature. KYC regulations provide a better means of identification verification, which invariably helps in maintaining the market’s stability. It also helps build a certain level of confidence and trust in investors.
• Reputational Damage Control:
KYC regulations prevent fraud and help to defend what they are known for, that is, their reputation. It works by freezing or completely shutting down accounts linked to or associated with the fraud.
• Reduction in money laundering, scams, and cybercrimes:
In 2021, cybercriminals laundered $8.6 billion worth of cryptocurrency. As a result, KYC regulations are in place to curb some of these fraudulent practices.
Uses of KYC regulations in DeFi
The importance of KYC regulations and compliance in DeFi cannot be overemphasized, particularly with the increase in cybercrimes. Some of its benefits include providing an avenue to examine clients to know if they have any history of illegal doings. It further helps increase investor confidence due to its potential to manage risks associated with a cryptocurrency exchange or company.
Beyond individuals, KYC regulations can support Middle East economies in reducing money laundering and other criminal activities. It further regulates the money that goes in and out of financial institutions. Hence, with KYC, the Middle East can access stability when decentralized financial institutions and structures are trustworthy.
Also read : Crypto Regulation Frameworks in the Middle East
Conclusion
KYC regulations alone might not eliminate the rate of money laundering, scams, and similar activities. However, it is a journey in the right direction in curbing some of these excesses. In addition, KYC regulations have proven to an effective and ideal practice in keeping cryptocurrency exchanges safe from crime.
