How Does a Crypto Payment Gateway Without KYC Regulate Users?

While this procedure works well, a part of the Web3 community believes it goes against the tenets of blockchain. In recent times, several cryptocurrency trading platforms have been exploring the idea of a no-KYC approach. However, there has been pushback and criticism regarding how crypto exchanges can maintain the features of KYC while eliminating it.

This article will examine how a no-KYC system can maintain oversight over user activity, balancing anonymity with fraud prevention. It will also ascertain if these measures are likely to gain acceptance from regulatory authorities.

How a Crypto Payment Gateway Regulates Users Without KYC

There are numerous ways a crypto payment gateway can regulate user activity without KYC. Some of them include:

• Blockchain-Based Transparency: One way to govern users without KYC is by ensuring transparent on-chain activities. Decentralized ledger technology offers immutable records, allowing crypto platforms to rely on these unchangeable records to regulate individual actions. Meanwhile, it is noteworthy that users will operate under a pseudonym.
• Smart Contract Integration: This measure builds on the concept of on-chain transparency, as the regulation relies on blockchain technology. Instead of simply monitoring users and relying on records, the payment gateway embeds all rules into a smart contract. In this setup, the system automatically enforces penalties for violations.

• Transaction Limits and Monitoring: To prevent fraud without KYC, crypto platforms can monitor and limit transactions. Users may need to meet certain requirements to access higher transaction limits. Failure to meet these requirements could result in demotion to lower transfer tiers.
• IP and Geo-Restriction Technologies: Cryptocurrency payment solutions can also regulate users based on their IP address and location. For instance, when a phone or device shares its IP address during website visits, the crypto platform can restrict access for violators by blocking the IP address used.
• Address Whitelisting and Blacklisting: In this approach, users are assigned pre-approved wallet addresses for transactions. The payment gateway ties these wallet addresses to the user’s IP address or location. To regulate activity, the system flags or blocks wallets suspected of engaging in illicit transactions.

Challenges of Balancing Anonymity, Security, and Regulatory Compliance

Proponents of the no-KYC feature argue that privacy is one of the tenets of blockchain technology. However, very few non-KYC measures are entirely foolproof. For instance, individuals can change their IP address using a virtual private network (VPN).

Users can also create multiple accounts on separate devices, enabling them to switch profiles if one is blacklisted or banned. Transaction limits are only partially effective, as malicious actors could patiently build their profiles and increase their limits to execute a “one big move.”

Even if technology-centered measures are effective, it remains uncertain whether they will convince regulators and the average user. KYC is a significant factor in building user trust, as it reassures them that the platform is genuine and its members credible.

Regulatory institutions are typically skeptical and demand crypto payment gateways to go above and beyond. Convincing governments that a no-KYC approach can prevent fraud might take substantial effort or even a miracle.