KYC on Crypto Exchanges: Protection or Betrayal?

[Chawla Solutions]

Know-Your-Customer (KYC) requirements have become standard across major centralized exchanges (CEXs), forming a clear divide between the ideals of decentralization and the demands of regulation. For some, KYC is a necessary safeguard; for others, it feels like a betrayal of crypto’s original promise of privacy and autonomy.

What KYC Offers to Exchanges:
KYC enables exchanges to partner with banks and regulators, unlocking fiat ramps and institutional investment. It supports anti-money laundering (AML) efforts, helping platforms avoid scrutiny and legal pressure. Compliance also opens access to global markets and lets firms scale “above board.”

What Users Sacrifice:
The cost is significant. KYC strips away anonymity by linking wallet addresses to real-world identities—eroding the foundational cypherpunk ethos. There’s also the looming risk of data breaches; personal documents and selfies stored by centralized entities can be hacked or leaked. Worse, exchanges gain the power to freeze assets or share user data with governments—adding layers of centralization and oversight.

Case Study: Binance
In 2023–24, facing SEC lawsuits and regulatory clampdowns, Binance made KYC mandatory to retain fiat capabilities. The move protected operations but alienated many privacy-focused users, who began shifting to decentralized exchanges (DEXs) and low-KYC alternatives like MEXC, Bitget, and Bybit.

The Takeaway:
KYC isn’t inherently bad—it’s the trade-off for participating in a regulated, scalable ecosystem. But for users prioritizing privacy, alternatives still exist: permissionless DEXs, low-tier CEXs, and self-custodied cold wallets. The balance between freedom and compliance remains a personal choice.