If a crypto enthusiast, not even a crypto fan, were ever to be asked what is the main purpose of decentralization, few would have the concrete knowledge to give a unified answer. Some would say that decentralization is the ability to distribute the storage and processing of transactions across a broad range of devices to protect them from centralized manipulation. Others would claim that decentralization is the ability to win freedom from surveillance and control of fiat by centralized banks. A third bunch would adhere to the conviction that decentralization stands for creating a parallel economy.
Though correct in their sum, none of these answers actually refers to the basic concept of decentralization that is relevant to the users themselves. Lest we forget, decentralization was initially developed to help the users escape the chokehold of centralized financial transaction processing. Satoshi Nakamoto postulated that the decentralization would be trustless, permissionless and fully transparent for all involved. However, one other key element that seems missing from the equation is the fact that decentralization implies a complete lack of individuality in the network.
Verification procedures for establishing the identities of users are the norm for virtually every single institution in the world. Be it a bank or a polling station, a school or a building’s concierge service – verification of identity is standard. The base purpose is rather simple – security. Having a tether to an identity is essential to establish one’s personal details and, if possible, cross reference them with available databases of criminals to prevent crimes or apprehend suspects, and to simply maintain records of personal presence.
In the financial world, the term Know Your Customer is tightly connected with another one – Anti-Money Laundering. The purpose of these two procedures is to establish the identity of financial services users. Once again, the reasons are many. Banks need such data to cross reference their clients with various databases to identify their creditworthiness or other important details like incomes. Central banks connect such databases to those of the authorities to make sure the latter have access to the financial flows of suspects. The complete control of financial movements is not only a necessary routine for banks, it is also an important instrument in the arsenal of police authorities in their hunt for criminals, terrorists and misappropriated funds.
The decentralized environment, however, was designed to be rid of centralized governance and oversight on the part of the authorities. Such a space would free users to buy Bitcoins without verification, thus allowing them to remain fully anonymous. The given situation is a godsend for not only adherents of decentralization and anonymity but also for all sorts of shady individuals and criminals alike. It is not difficult to imagine a drug addict avoiding banks for the purchase of drugs, while migrating into decentralized space to buy the same dose using cryptocurrencies in completely anonymous fashion using untraceable funds.
The ability to buy Bitcoin without passing Know Your Customer or Anti-Money Laundering procedures has long remained a major attraction of crypto trading platforms until the onset of mandatory regulations that forced many of the centralized platforms into the legal field. The ones that remained were faced with a choice of either going offline, or migrating to jurisdictions without such legal requirements. But those too quickly ended, leaving decentralization as the only venue left.
The fact that decentralized platforms allow their users to buy Bitcoin without providing any kind of identification in fully anonymous fashion using peer-to-peer mechanisms gives them a specific edge. The edge, of course, is specific to the users who are cautious about revealing their identities. It is therefore natural that the authorities will focus on such platforms, looking for people who buy or sell Bitcoin in large amounts. It would be foolish to think that the authorities do not possess the means to trace whoever they want to on the blockchain.
The network may be called anonymous, but it is not. Specialized software suites allow the authorities to trace the pathway of individual funds all the way to their holders. The use of mixers, or tumblers, is the only way for users to avoid tracing. These services mix cryptocurrencies from different sources into a single batch, essentially diluting the trace of individual assets and making them less traceable. But these services are not perfect and it is only a matter of time before the authorities identify who a certain cryptocurrency belonged to.
But despite the many attempts by the authorities to limit or at least legalize the purchase of Bitcoins and other cryptocurrencies, there are still plenty of venues in decentralized space that offer users the ability to purchase their assets in fully anonymous fashion.
The need to provide verification of identity is becoming acute in light of the growing threat of terrorism and instability around the world. Add to that the total bacchanalia that arose around the Covid-19 pandemic, and we have the makings of a true police state that wants to monitor its citizens’ every move. In fact, every state wants to know what its citizens are doing, when and where. This is the essence of centralization – the pooling of data about everything and everyone into a single repository for instant analysis and revelation of individuals who are either deviating from the norm or simply breaking the law.
There is no law in the decentralized frontier, as users are free to engage in any activity provided by the decentralized application developers. It is actually the task of the developers to ensure the legality and reliability of their creations, adhering to existing legal frameworks and regulations on both financial security and the preservation of user data.
The recent introduction of the FATF framework made it more difficult for developers of decentralized applications to challenge the need for user data storage and handling. However, these requirements apply only to developers who are aiming to abide by said regulations. Decentralized platform services do not need to maintain any user records, since they operate as non-custodial services. Essentially, users join such platforms using their own wallets, which are anonymous by default. In such a scenario, it becomes difficult for the authorities to track anyone.
Another major problem in the decentralized market is the abundance of absolutely ridiculous scams and platforms that offer no services whatsoever. Such projects are usually registered on domain hosting platforms with low reputations. They do not provide any statutory documents, licenses or even the identities of the founders, or contact details. The presence of any documents on these platforms is merely a formality aimed at duping users into believing that they are actually on a credible website.
It is very easy to check whether a website is credible or not, but most users do not know how to do that. More destructive is the fact that such fraudulent exchanges and financial platforms act as repositories of funds for their founders, and the funds are provided by trusting users. It is absolutely pointless for users to try and turn to the authorities with complaints against such resources, since the police will simply reach a dead end the moment they open the domain and find out that it is not registered to any real individual who could be charged with fraud. This is yet another powerful example of why user verification is necessary as a mandatory procedure on exchanges.
The repercussions of encountering such fraudulent platforms are rather obvious, but their abundance indicates that users of decentralized space are still poorly educated on both the essence of the digital environment and the perils that reside within. With that said, it is possible to state that a good proportion of the decentralized exchanges operating on the market are likely to be scams. The reasons are the same – since the founders of platforms that are not required to abide by Know Your Customer procedures are also not obliged to register any legal entities or provide information about themselves.
The sad reality of decentralized space would actually force many users to leave out of disillusionment. However, the ability to buy Bitcoin legally is available and it can be found on centralized platforms. The many legal exchanges, like Binance, are operating with a full set of documents and licenses not only in their home jurisdictions, but also internationally. Another example is the KuCoin exchange, which is not only dubbed the “People’s exchange”, but is also planning on opening several regional offices in such countries as Dubai.
In order to buy Bitcoin in large amounts, users will have to register on a centralized exchange and pass the full range of mandatory procedures, including Know Your Customer and Anti-Money Laundering. Once they provide their identity details, passport details and sign up to the exchange, users will have the ability to buy Bitcoin and sell it at will for as much as their budget will allow.
If buying Bitcoin without verification is crucial, then the only option left is to sign up to a decentralized exchange. In this case, users have to conduct extensive research about the platform to make sure it is not a scam. Should the platform prove to be reliable, then it is safe to use in anonymous fashion through connection of a wallet.
There is no such thing as anonymity on the internet. All users who wish to interact with financial services in one way or the other will have to reveal their personal data and register on an appropriate platform. The opposite tradeoff is the likelihood of encountering a scam exchange or service provider and losing funds. Though it may seem that the cases are extremes, the reality of the market is such.