CZ on Regulations, Exchanges & Privacy
There is still much confusion about regulations, KYC, AML, privacy, and specifically how they are related to different types of exchanges. On this blog, CZ shares his best knowledge on these issues and hope they can help you as well.
Recently, a user of Binance Singapore was surprised when his account was flagged by AML/CFT controls because he used a mixing service. His post on Twitter had quite a number of comments. More importantly, from the comments, it's clear that there is still much confusion about regulations, KYC, AML, privacy, and specifically how they are related to different types of exchanges. While I am not an expert, I will share my best knowledge on these issues and hope they can help you as well.
Regulation is a broad topic that’s out of the scope of this little article. We will keep it very simple here. While it varies by country, there are 2 basic requirements that are relatively universal for most regions: KYC & AML.
KYC (know your customer) means the exchange should know the customer. This is why exchanges ask for your ID, proof of address, etc.
AML (anti-money laundering) means the exchange must analyze each transaction and make sure they are not related to money laundering, sanctions or fraud.
For both KYC and AML, there are specialized service providers that do the analysis for exchanges and regulators. In the fiat world, banks ask for information on sources of funds, proofs of address, etc. In the crypto world, there are service providers who analyze on-chain transactions and assign different risk scores to different transactions. Most regulators require exchanges to use these 3rd-party providers. It’s not a choice for the exchange to make. Many people don’t realize this and blame the exchange. More on this later.
Now, let’s quickly go through the different types of exchanges.
“Regulated” exchanges. These are exchanges domiciled in a specific country that has clear regulations or at least some official guidelines. Some countries issue a clear “crypto exchange license.” Others require the exchanges to “register” with a specific agency in the country, while a few just ask the exchanges to get traditional financial services licenses. Again, each country is a little bit different.
“Non-regulated” exchanges. For the lack of a better word, we will use the term “non-regulated” here. These are typically exchanges that are either domiciled in a country that doesn’t have clear guidelines or those that are not domiciled in any specific country.
Decentralized exchanges (DEX). While the two types above mostly refer to centralized exchanges, there are many DEXs out there. These are usually based on a smart contract or blockchain. Most of these don’t have a specific domicile location and are usually “non-regulated.” There are different levels of decentralization, but that’s a topic on its own.
Most regulations put AML above privacy. It means they will require exchanges to run AML checks. The exchanges have no option here. Well, technically they have 2 choices: 1. run the AML checks, or 2. don’t do business here. Option 2 doesn’t help anyone.
As a user, you have choices:
Use a regulated exchange knowing there will be AML checks running in the background, similar to banks. Please make sure that you're following the laws wherever you reside when it comes to crypto trading. It will save yourself and the exchange a lot of trouble. Moving from one exchange to the next won’t help.
Use a non-regulated exchange, knowing that there are risks here too. Choose your exchange wisely.
Use a DEX. These generally have lower liquidity and no fiat access.
The Binance name has evolved to be more than just a company or just one centralized exchange. There are a number of regulated fiat-crypto exchanges using the Binance brand and technology, including Binance Singapore, Binance.US, Binance Jersey, etc. All of these are independently operated and fully compliant with their local regulations. There is, of course, the Binance.com global centralized exchange. And there is also a Binance DEX running on top of BNB Chain that’s maintained by a group of community developers.
At Binance, we strive to provide you with different choices and different levels of privacy. We don’t live in a perfect world. There are different compromises with each of the choices. It is important to understand the choices in front of us and the world we live in. I hope this article helps with that understanding.
We believe privacy is a fundamental right and are supportive of privacy-driven initiatives.
As always, if you have any questions about Binance, feel free to tweet at me, and I will do my best to answer you. We strive to maintain open communication with our community.
The article has been edited on June 21, 2022.