KYC is a verification process in the blockchain and financial industries to authenticate users' identities. In the Web3 industry, KYC maintains regulatory compliance, improving security, and deterring fraudulent activities. This procedure is commonly incorporated into DeFi platforms and cryptocurrency exchanges to build trust while maintaining decentralization and user privacy principles.
KYC entails the gathering and validation of user data, including government-provided identification, copy of the proof of address, and other private information. By doing this, we remove risks to illegitimate activities, like money laundering, fraud, or terrorism financing by requiring you to be real users. Including KYC for blockchain projects that are looking to gain mainstream adoption allows them to align with international financial regulation and gain the support of institutions.
Meanwhile, in DeFi platforms such as lending, borrowing, and staking, KYC is becoming more prevalent, and users are starting to learn to wrap their heads around it. Just for the sake of creating a more secure environment and/or complying with legal frameworks, user verification enables platforms. But while KYC is necessary, many DeFi platforms have been building ways to integrate KYC without sacrificing user privacy and decentralization, sometimes by utilizing more complex cryptography or decentralized identity solutions that preserve data security and minimize exposure.
KYC is of great importance to cryptocurrency exchanges, enabling fiat to crypto transactions, as well as meeting anti-money laundering (AML) regulations. This allows them to operate within the confines of the law and build credibility with the users, regulators,s and financial institutions.