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Few letters spark fiercer debate in blockchain than these three: KYC. Over the last decade, Know Your Customer rules have permeated most crypto industries, but despite their widespread implementation, they remain controversial in sectors that have traditionally been largely devoid of regulation.
Few centralized exchanges today operate without KYC save for a handful of shady offshore platforms. The remainder have fallen into line, recognizing the need to adhere to financial regulations, avoid censure, and mitigate the flow of hacked and laundered funds. One frontier that’s been slower to adapt to this paradigm is mining, an industry where anonymity still reigns supreme.
But as the industry becomes more tightly enmeshed with other crypto sectors and adds fiat onramps, mining companies too have acceded and begun implementing KYC. While the hesitance of the mining operators still holding out is understandable, resistance is futile. Despite what its critics claim, KYC is merely the cost of doing business today – and there’s compelling evidence that its widespread implementation will be a net good for mining.
In the Beginning There Was None
Crypto started out with zero regulations at a time when most people had never even heard of Bitcoin and even its most ardent supporters could not have predicted it growing into a multi-trillion dollar industry. In the earliest days of Bitcoin, there weren’t even wallets, let alone exchanges to trade on, while concepts such as onchain analytics were still years away from conception.
Over the years, the development of blockchain tooling, fiat gateways, coupled with rising regulatory scrutiny and global adoption, have all served to make KYC the norm for accessing most crypto platforms and products. The apocalyptic predictions of wide scale data theft, identity fraud, and darknet data resellers haven't come to pass. KYC has changed very little from a user perspective, while the emergence of decentralized identity solutions (DID) now support customer verification without reliance on centralized databases.
Which leaves just mining and DeFi as the two primary industries where widespread KYC implementation has yet to become the norm. In the case of the latter, this is largely a logistical challenge: there are too many protocols on too many chains and their decentralized design and lack of fiat rails makes it virtually impossible for financial regulators to enforce compliance. There’s also a case for saying that DeFi users, particularly the unbanked in developing countries, should be free to access decentralized protocols that form a haven against inflationary fiat.
Bringing Miners In From the Cold
Mining’s slowness to introduce KYC is largely a cultural rather than a technical issue. As the world’s first industry that empowered anyone to earn from crypto, mining has a rich pedigree and a history of anonymity. To this day, freshly mined coins that have never previously been spent onchain can attract a premium in an age of blockchain forensics.
While solo miners are still free to do their thing without KYC in most cases, mining platforms have less latitude. Given the number of users they serve, the value of the crypto assets and hashpower being traded, and the presence of fiat onramps and stablecoin payments, KYC is unavoidable. Most major mining platforms have now implemented it fully or partially for certain services, and it’s only a matter of time until other major operators follow suit.
The introduction of KYC throughout the mining industry is a net good that will not just prevent regulators from circling, but increase capital in-flows. Institutions will be able to participate in mining and in trading hashpower, enabling miners to make more money while shining a spotlight on this growing subsector of crypto mining. KYC also provides a safety net for miners who can have confidence that their pool operator isn’t going to go AWOL with their funds or be shut down overnight.
Miners who wish to retain their anonymity will always have pools willing to accept their hashpower. But the commoditization of mining has transformed it into a global industry that must meet global standards. It’s thanks in part to crypto regulations that the coins earned by miners have become so precious. KYC is the inevitable price of progress, bringing greater legitimacy and providing a framework for the industry to reach new heights.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice
