CEX.IO company blog | KYC practices on cryptocurrency exchanges: will DEX become a haven for illegal activities?

Analytics company CipherTrace recently published a study indicating that 56%cryptocurrency exchanges use weak policiesKYC. Among decentralized exchanges (DEX), the percentage of such players is even higher - 81%. Dmitry Volkov, CTO of CEX.IO expressed his point of view on this topic.

KYC can be very resource intensive indeed.The main objective of KYC and AML policies with a probability level is to collect data about the client and understand the source of origin of funds. At the same time, it is almost impossible to achieve 100% confidence.

Each company decides for itself whatthe level of confidence and security they are comfortable with and what risks they are willing to take. Some companies have a high level of acceptable risk. Why? Because they may be registered in unregulated jurisdictions and draw the (incorrect) conclusion that it does not matter which jurisdiction's customers use the product.

Any KYC and AML procedure, evenprimitive level, reduces the number of people who will eventually begin to interact with the product. Therefore, greed comes in: the fewer barriers, the more potential users and, accordingly, income.

As for DEXs, since they are outside the regulatory framework, this creates additional risks of money laundering.

1) On Uniswap, it is impossible to block an account, as can be done on centralized sites. Uniswap is a smart contract. You cannot freeze a transaction with it, and this is convenient for withdrawing money.

2) It is more difficult to mark through DEX that fundsstolen, and it is easier to split them into many parts for different addresses. This is what the “money launderer” needs, who wants to cover their tracks. In this case, funds do not have to change one asset for another. Through the DEX you can put them in DeFi - now the stolen money in the liquidity pool with the rest is used for the economic activities carried out by the DEX.

The question arises: will DEX really become like this?an uncontrolled conduit for illegal activities because it cannot be regulated? Not at all necessary. The regulator is able to impose strict measures, for example: “any transaction passing through this channel is considered illegal by us.” Since there are tools to track such transactions, this may reduce the desire of people to use such platforms if they end up receiving illegal funds.

And the KYC procedure within decentralized platforms is also possible. KYC can be connected through an oracle system, which will also be decentralized.

Read the full material here.

You can read more about the CipherTrace study here.