Decentralization and KYC Compliance: Critical Concepts in Sovereign Politics

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Due to the decentralized nature of Web3 projects, it is difficult for traditional regulators to manage them. For a long time, the community saw this as a positive because it meant that these projects were outside government control.

However, as these projects grow in popularity, regulators are increasingly scrambling to find ways to manage them. One of the areas where this is most evident is Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance.

KYC has had very negative connotations in the Web3 community. People see it as an invasion of their privacy and a way for the government to control them. They also see it as the antithesis of blockchain technology, which is supposed to be decentralized and anonymous.

In this article, we will attempt to answer the question: Does KYC really impinge on decentralization? We will examine the arguments for and against KYC compliance and try to determine if Web3 projects should take this into account.

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For a long time, the decentralized nature of Web3 projects meant that there were no rules or regulations governing them. This was seen as a good thing by many, as it meant that these projects were beyond government control.

It dates back to the early days of Bitcoin, when anonymous creator Satoshi Nakamoto said the cryptocurrency was designed to be "a peer-to-peer electronic payment system" that needed "no third parties of confidence". This meant that there was no central authority controlling Bitcoin, and it was up to users to decide how to use it.

Naturally, this lack of regulation also meant that there were no rules against things like money laundering or terrorist financing. This led to Bitcoin being used for various illegal activities on the dark web, which reinforced negative associations that it was used for criminal purposes.

The way the integration used to work for crypto projects: users would go to their website, download the software, then send them money. There was no KYC or AML compliance as there was no way of knowing who the money was being sent to.

Everything changed when crypto ecosystems started to grow and attract more mainstream users. As more people started buying crypto, the exchanges they used started implementing KYC and AML compliance measures.

Early pushback against big players

It was a necessary evil to continue to develop the ecosystems and attract more users. But it also caused a lot of friction within the community, as many people believed it was a way for governments to control them.

The tension came to a head in 2017 when the Chinese government cracked down on initial coin offerings (ICOs). This has led to a mass exodus of crypto projects from China to friendlier jurisdictions like Hong Kong and Singapore.

However, even in these more crypto-friendly jurisdictions, KYC and AML compliance was still required to comply with the law. This led to many projects respecting KYC-AML in a way that the community considered too intrusive.

For example, Binance, one of the largest crypto exchanges in the world, has been accused of...