What is KYC?
KYC or “Know your customer” is a regulation that any company with a banking relationship must comply with. Bitcoin exchanges are no different. These rules are imposed throughout the world and are aimed at ensuring that a company that acts as an exchange and / or transmitter has “adequate” information about each client it serves.
Within the Bitcoin space, “progressive KYC” is a disease that is slowly spreading. If you buy through one of these regulated entities, you essentially tag your bitcoin addresses to your personal identity (see the case of Coinbase). This makes it trivial for chain surveillance companies, the companies they work with, or worse yet, governments, potentially …
- Track your spending habits
- Prevent you from using other regulated services
- Confiscate your bitcoin
- Come after you for tax obligations
- They generally know more about you than they should
- This is NOT a way to use Bitcoin, because exact against these measures has been created.
We get it, a Bitcoin-exclusive company’s automatic DCA makes “stacking satellites” super simple and easy. We are not saying that these companies are bad actors, far from it. We simply want you to think about what you have to give up or risk for this simplicity. Read on and come to your own conclusion …
What information will I have to provide?
To buy bitcoins from a KYC exchange, users will need to provide personal information. The quantity you need to supply varies from one to another, some may require a simple name for small quantities (you could easily provide an alias), and others may require all of them. Most will ask for any combination of the following …
- Phone number
- Driver’s license, ID
- A selfie holding a piece of paper with the name of the exchange and the date.
- A video call with the exchange.
Why is providing this information a risk?
KYC information links your personal identity to any bitcoin you buy. The exchange knows …
- How much did you buy
- when did you buy it
- Your bank information
- Where do you send them
A central point that has millions of people’s confidential and personal information creates a huge pot of honey at risk of being stolen due to incompetent security practices at some of these companies. How would you feel if your name, address, photo, and exactly how much Bitcoin you own were stolen from an exchange and sold to the highest bidder in a darknet market? This sounds alarming, but data breaches happen too often!
Most of these exchanges work, in some form, directly with the chain’s surveillance companies (and some, directly with government agencies! See the case of Coinbase). To continue complying in the chosen jurisdiction. The completely transparent nature of the Bitcoin blockchain means that anyone with the correct set of tools (such as a chain surveillance company) can follow its activity. If you withdraw or deposit with an entity that the exchange does not like, it may freeze or even close your account. It doesn’t exactly fit the censorship-resistant properties that Bitcoin is famous for!
Order of type 6102
Executive Order 6102 is an executive order signed on April 5, 1933 by the President of the United States, Franklin D. Roosevelt, which “prohibits the hoarding of gold coins, gold bars, and gold certificates within the United States. continental “.
If your country’s government were to exercise a similar order against Bitcoin, anyone who bought bitcoin through a KYC source would be an easy target for confiscation. The excuse that “you lost it in a boating accident” won’t get you very far when under pressure from a three-card agency. Tax agencies around the world assign the responsibility to the individual to prove your innocence, it is not for them to prove that you have not paid taxes.
Not to mention the fact that they will know the addresses you retired to and could keep an eye on them for any movement (the blockchain is completely transparent, don’t forget).
Coinjoin can obfuscate the final direction of your coins if you practice good spending habits after mixing, but this doesn’t change the fact that they know exactly how much you bought and when you bought it.
Do I have other options?
Fortunately, there are some options to buy Bitcoin without KYC sources. These are all P2P (peer to peer) exchanges where you negotiate directly with another person and not with a centralized third party. Unfortunately, some sell other currencies in addition to bitcoins, so we advise you to be careful.
|Demo uisng HODLHODL||Demo using Bisq||Demo using LocalCryptos||Demo using LocalCoinSwap|
ATMs are another great option, but use them with caution, as some still require different levels of identification depending on the amount purchased. Many will only require a phone number, so be sure to use one that is not labeled with your personal identity. Check out Coin ATM Radar for a great overview of what’s available in your local area.
Doesn’t buying bitcoins without KYC carry a hefty premium?
It is absolutely true that you will see some offers to buy bitcoins on exchanges / P2P exchanges for some very high commissions on the spot price. However, if you are patient enough, you can pick up some on the spot or only marginally (1-4%) on top. Both Bisq and Hodl Hodl allow you to create a “buy offer” which is essentially telling the market that you want to buy an “X” quantity of bitcoins at “X%” relative to the spot price. All you need to do is wait for a seller to accept your offer and complete the trade.
We personally take this approach and have never waited more than a day for someone to accept the offer of a premium of around 2-4%, which we are very happy to pay for the huge increase in privacy gained.
A thought experiment on the “premium” without KYC
If you ever sell bitcoin KYC, depending on your jurisdiction, you will likely pay around 20% of your profit in capital gains tax (or equivalent VAT / GST obligations). If you buy 1 BTC for $ 10,000 and sell it for $ 20,000, you are required to pay around $ 2000 in taxes.
If you bought that same 1 BTC at a 4% premium over the $ 10,000 spot price, you would have paid $ 10,400 for the same amount of sats and the only person you know owns them is your trading counterpart.
How else can I get bitcoins without KYC?
There are several ways, each with different levels of difficulty and complexity …
- Earn it
- Sell unwanted goods, or create a website with your products / services
- Buy it from a friend or at a local gathering
- Have a donation page (LNtxBot, Paywall.link or Paywall web, Tallycoin, Tippin.me, BTCpay Crowdfunding)
- Pay for dinner when you go out with friends and ask them to refund you via bitcoin (maybe for a little discount?)
- Mine (check out this great piece on garage mining)
What is KYC “shotgun”?
This is where an exchange offers account registration without KYC and subsequently prompts users for it when they try to withdraw funds. You can avoid this by moving away from centralized exchanges with a single point of failure and sticking to the P2P options listed above.
Can I cancel the KYC myself?
Once you have bought Bitcoin from a KYC source, you will never be able to undo that. Not even with advanced techniques like Coinjoin that create forward-thinking privacy. You have two main options …
Go back where you came from and start again
Sell your KYC purchased coins on the exchange you bought them on. Depending on your jurisdiction, this will likely create a taxable event that you will have to deal with, but then you will have a paper record to show that you no longer own those coins. This process provides you with a ‘clean start’ from which you can begin earning Bitcoins through a non-KYC source, safe in the knowledge that you are no longer vulnerable to the risks described above (other than data leaks as regulated entities they are required by law to keep these records for a time).
Keep two stacks
Stop buying bitcoin through KYC sources immediately and fully separate and label those funds. Start earning bitcoins through a non-KYC source, making sure to maintain full segregation. This option still leaves you vulnerable to some of the risks outlined above, but it may be easier for those with smaller KYC amounts or those who don’t want to sell and deal with taxable events.
KYC is dangerous, ineffective, and puts people at risk.
Avoid creeps. Only without KYC