Know your customer (KYC) refers to a financial institution’s obligation to carry out identity checks before allowing someone to open an account, trade, or use its product or platform. A potential user has to provide a driver’s license or something similar. It is meant to reduce anonymous transactions and money laundering. Currently, decentralized exchanges (DEXs) do not have to meet KYC requirements because they trade through smart contracts instead of a central trading desk. The information below refers to an ‘unhosted’ wallet, which is a ‘non-custodial’ wallet.
Regulations across countries are different and changing:
EU changed their rules (March 2022)
All transfers of crypto-assets will have to include information on the source of the asset and its beneficiary, information that is to be made available to the competent authorities. The rules would also cover transactions from so-called unhosted wallets (a crypto-asset wallet address that is in the custody of a private user). Technological solutions should ensure that these asset transfers can be individually identified. The aim is to ensure that crypto transfers can be traced and suspicious transactions blocked. The rules would not apply to person-to-person transfers conducted without a provider, such as bitcoins trading platforms, or among providers acting on their own behalf.
U.K. government has disagreed ( June 2022) and will not require senders of crypto assets to collect information about recipients who use unhosted wallet addresses).
“Instead of requiring the collection of beneficiary and originator information for all unhosted wallet transfers, crypto asset businesses will only be expected to collect this information for transactions identified as posing an elevated risk of illicit finance,”
U.K. Treasury Consultation Paper