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You're excited to start trading on your favorite crypto exchange, so you quickly sign up, upload your ID and other personal documents, and start buying and selling your favorite digital assets. But have you stopped to consider the risks involved in sharing all of this sensitive information with a third party?
Welcome to the world of Know Your Customer (KYC) requirements, a necessary evil for many crypto exchanges looking to comply with anti-money laundering and counter-terrorism financing regulations. While these requirements are meant to prevent illegal activities, they also raise concerns about privacy and the potential for data breaches.
In recent years, we've seen numerous examples of major data breaches at well-known companies, including Yahoo, Marriott, and Equifax. In each case, millions of customers' personal information was compromised, leading to identity theft and other serious issues. And while it's not yet clear how many crypto exchanges have experienced similar breaches, the risks are real and should not be ignored.
One high-profile example of a crypto exchange suffering from a data breach is Binance, one of the largest and most popular exchanges in the world. In May 2019, the exchange suffered a hack that resulted in the loss of over 7,000 Bitcoin, worth over $40 million at the time. Another example was back in 2018, when the popular South Korean exchange Coinrail suffered a major data breach that resulted in the theft of over $40 million worth of various cryptocurrencies. The hackers were able to gain access to the exchange's hot wallet, which contained a significant portion of the exchange's assets. Other examples include the 2014 Mt. Gox hack, which resulted in the loss of over 800,000 Bitcoin (More than $13 billion today!) and the 2016 Bitfinex hack, which resulted in the loss of over 120,000 Bitcoin ($2 billion +).
These attacks highlight the importance of exchanges taking stronger security measures to protect their users' assets and personal information han ever. It's also important for users to be aware of the risks involved in holding their assets on an exchange and to consider using more secure storage options, such as hardware wallets, for long-term storage (check out my article on different types of wallets!). But, back to KYC and identity verification...
So how can you protect yourself when it comes to KYC requirements on crypto exchanges? Here are a few basic tips:
Use a secure email address. Instead of using your personal email address, consider setting up a separate, secure email account specifically for your crypto trading activities.
Enable two-factor authentication (2FA). Many exchanges offer 2FA as an added security measure, which requires you to enter a code sent to your phone or email in addition to your password.
Use a password manager. A password manager can help to generate strong, unique passwords for each of your accounts and keep them safe and secure. I recommend KeePass XC, which is a completely local password manager, meaning no other entity can access your password manager and passwords. Another good option is Bitwarden.
The tips above are basic ones that will help protect your information in case of a data breach. However, you might want to go a different route. Consider using a decentralized exchange (DEX). DEXs operate on a decentralized network and do not require you to provide any personal information, making them a more privacy-conscious option.
Tip #6 is personally my preferable way to go. Decentralized exchanges operate on a decentralized network, which means that they do not require users to provide any personal information or undergo KYC verification. This makes them a more preferable choice for privacy-conscious traders who want to avoid the risks associated with sharing sensitive information with a third party. For those who want to go even further, there are several notable P2P exchanges on the Tor network. Either way, it is crucial to research and compare different DEXs to find the one that best meets your needs.
While KYC requirements are a necessary part of the crypto exchange process, they also come with risks that should not be ignored. By following these tips and being cautious about the information you share, you can help to protect your privacy and keep your personal information safe.
