Non-KYC trading platforms are cryptocurrency trading platforms that do not require users to provide identity verification documents such as an ID card or proof of address. These platforms allow easy trading without having to go through traditional verification procedures. These platforms have witnessed wide acceptance and popularity among trading platforms. In this article, we will learn more about them and find out the reasons for that.
Prominent examples of these platforms are: Uniswap and PancakeSwap. Uniswap is the largest platform in this space, recording 12 million monthly active users in August 2024 with a market share of 60%. While PancakeSwap attracted about 1.9 million unique users in the same month.
Reasons for the popularity of non-KYC trading platforms:
Maintain privacy and anonymity:
Users who value their privacy are drawn to these platforms because of their ability to provide a trading experience free from traditional surveillance. With data breaches and digital surveillance on the rise, these platforms provide a solution for those who wish to remain anonymous.
Accessibility:
The lack of lengthy verification procedures makes these platforms attractive. They are a preferred option for those living in countries that restrict cryptocurrency trading or for individuals who lack access to traditional financial systems.
speed:
These platforms allow users to instantly enter the cryptocurrency market without waiting for account verification. They also provide the flexibility to create multiple accounts and transfer funds without restrictions.
Avoiding regulations:
Some users turn to these platforms to avoid regulatory restrictions or sanctions. Despite the legal risks associated with this type of activity, some believe the benefits outweigh the potential challenges.
Risks and Challenges Associated with Using Non-KYC Trading Platforms:
While non-KYC trading platforms offer advantages in terms of convenience and privacy, they come with a set of risks and challenges that users must take into account. These risks include security and regulatory aspects as well as limitations in available features. Some of the most notable risks include:
Security concerns:
These platforms provide an anonymous environment, making them attractive not only to privacy-seeking users, but also to scammers. In the event of technical platform failures or fraud, the lack of accountability mechanisms makes it almost impossible to recover stolen assets or receive support.
Regulatory risks:
As governments increasingly focus on regulating the cryptocurrency market, non-KYC trading platforms are expected to soon become a target for regulators. If these entities are able to track users via their crypto wallet addresses, these individuals could face severe legal penalties, putting their funds at risk.
Limited features:
Non-KYC trading platforms lack the feature set of traditional platforms. For example, they often do not support fiat currency withdrawals. Also, the low liquidity of some cryptocurrencies leads to a lack of trading pairs, limiting the options available to users.
A look at decentralized finance (DeFi):
By November 2023, the value of assets stored in the decentralized finance (DeFi) sector exceeded $50 billion. DeFi uses have evolved from yield farming to services such as staking and lending, reflecting a shift in investor interest and an expanding range of options available in the decentralized marketplace.
Decentralization: A Double-Edged Sword for Non-KYC Cryptocurrency Exchanges While decentralization aligns with the core values of privacy, freedom, and autonomy, these advantages can come with significant risks.
For example, decentralized trading platforms that do not follow the “know your customer” (KYC) principle may become a breeding ground for illegal activities such as money laundering and fraud. ,Due to the absence of a central authority and the platform being autonomous, they are often operated using smart contracts, which makes it difficult for users to get support in cases of fraud or bugs.
While some trading platforms may have communities that support users by answering frequently asked questions, the lack of a central authority also means there is no one to turn to for complaints or dispute resolution. In contrast, traditional banks protect depositors’ funds through recognized insurance programs.
For example, the UK’s Financial Services Compensation Scheme (FSCS) guarantees protection for up to £85,000 per person at each financial institution, while protection for joint accounts extends to £170,000. In the US, the Federal Deposit Insurance Corporation (FDIC) provides a similar guarantee for deposits of up to $250,000 per depositor at each insured bank.
In cryptocurrency trading platforms, some platforms offer insurance coverage to protect users from losses resulting from system or platform application failure. However, this coverage is usually limited and may not cover all possible types of losses. If the platform does not follow the KYC principle, such protection is not available. Therefore, in the event of a hack or fraud, users may face difficulty in recovering their funds due to the lack of adequate protection.
In addition, regulators around the world are tightening their control over decentralized platforms, which can expose users to legal risks, asset freezes, or even criminal investigations. It is also important to note that most cryptocurrency exchanges, including those that follow KYC, are not covered by traditional insurance programs such as the FSCS in the UK or the FDIC in the US. However, some platforms offer their own insurance policies that cover certain losses, such as those resulting from hacks. These policies are usually limited and cover only a small portion of users’ funds.
Therefore, traders should always check the insurance terms offered by the platform before making any trades, as the level of protection is usually much lower compared to traditional insurance plans that protect bank deposits.
Examples of the use of non-KYC decentralized trading platforms in money laundering:
Although decentralized exchanges offer many advantages, they are sometimes used for organized money laundering and illegal financial activities.
Here are two prominent examples of how these platforms are exploited for money laundering:
Hydra is one of the most notorious Darknet markets used to launder money through decentralized exchanges that do not require KYC (Know Your Customer) procedures. The market, which primarily operated in Russia, was known for illegal activities such as fraud and drug dealing, funding these activities with cryptocurrency transactions, especially Bitcoin.
Hydra operators laundered millions of dollars using a combination of decentralized, non-KYC exchanges and Bitcoin mixers that mix cryptocurrency transactions to make it difficult to trace the source of funds. Since these platforms do not require identity verification, it was easy for criminals to convert illicit Bitcoin into legitimate cryptocurrencies without revealing their identity.
Hydra has been operating for several years, avoiding regulatory oversight thanks to the lack of KYC procedures. The anonymous transactions scattered across multiple blockchains have made it difficult for law enforcement to effectively track the flow of funds.
Case Study 2: Money Laundering Using Tornado Cash and Ethereum
Tornado Cash, which was later banned, was used as a tool to launder illicit Ethereum funds. The Tornado Cash platform was a crypto mixer that aimed to hide the source of funds by mixing recognizable funds. In 2022, it was revealed that the Lazarus Group, a North Korean hacking group, used Tornado Cash to launder over $600 million stolen from the Axie Infinity hack. The hackers used Tornado Cash to transfer the stolen Ether (worth $3,491.08) to decentralized, non-KYC exchanges.
ETH and ERC-20 deposits were accepted via multiple smart contracts on Tornado Cash, and then these deposits were withdrawn to another address using cryptography, which severed any connection between the sender and the recipient. Thus, attackers were able to hide the transaction trace and manipulate the flow of funds.
How to Protect Yourself When Using Non-KYC Trading Platforms
When dealing with non-KYC trading platforms, it is necessary to take some precautions to protect funds, as there is no central authority to turn to for complaints or support in case of problems.
Here are some important steps to enhance security:
Use strong passwords:
Make sure all your account passwords are long and complex, and avoid using easy or repetitive passwords. To store your passwords securely, you can use a password manager to generate and store complex passwords.
Turn on two-factor authentication (2FA):
Enabling two-factor authentication (2FA) adds an extra layer of security to your account. With this feature, even if your password is compromised, your account will still be protected from unauthorized access.
Use a Virtual Private Network (VPN):
A VPN can help hide your physical location and encrypt your internet connection, adding another layer of privacy and protection against cyber attacks.
Withdraw your funds to a cold wallet:
When using a decentralized exchange (DEX), make sure your funds are kept in a non-custodial wallet. However, it is best to transfer any extra funds to a hardware wallet to keep them safe and offline, and only keep what you need in the wallet connected to the exchange.
Avoid falling into phishing schemes:
To avoid falling for fraudulent sites, always make sure to check URLs and smart contract addresses. Also, make sure that the emails and links you receive are authentic, and do not click on suspicious or unknown links.
Following these steps will help you reduce the risks associated with using non-KYC trading platforms, and increase personal security while trading cryptocurrencies.
