How Do KYC and AML Regulations Impact User Privacy on Custodial Exchanges?

Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations require custodial exchanges to collect and verify the personal information of their users. This typically includes a government-issued ID, address, and sometimes a source of funds.

This process significantly reduces user privacy, as personal data is stored by the exchange and can be shared with government agencies. While these regulations are intended to prevent illicit financial activities, they create a trade-off between regulatory compliance and the principle of anonymity that is often associated with cryptocurrencies.