What Is a “Non-Custodial” Exchange and How Does It Relate to the KYC/AML Problem?

A "non-custodial" exchange, like a Decentralized Exchange (DEX), is a platform where users trade directly from their own wallets, and the exchange itself never takes possession or custody of the users' funds. This is achieved through smart contracts.

This model fundamentally relates to the KYC/AML problem because, without custody, the exchange has no central point of control over the funds or the user. Since the exchange never holds the assets, it cannot be compelled to enforce KYC/AML checks on users, making it a major challenge for regulators to apply traditional financial oversight.