KYC/AML and Hidden Centralization: A libp2p-based Atomic Swaps Exchange Protocol
By: Vladislav Sopov
Tags: Crosschain, Cryptocurrency, Ethereum, Atomic Swap, Bitcoin

Photo by Yung Chang on Unsplash

Anonymity seems to be the holy grail of cross-blockchain exchanges. Not so many users want to disclose his or her identity, let alone to send scanned ID-copy or the proof of income.

Thus, KYC-neutrality is a sine qua non for the proper decentralized multi-chain wallet. But the regulators continue to think otherwise which results in a couple of serious challenges for market players.

KYC vs Exchanges: When Delusions Crash

Some major platforms had worked either with no KYC-restrictions or with very soft requirements in this field. The world-leading exchange Binance can be treated as a textbook example in this regard.

For years, they have been one of the among leaders of KYC-neutral projects, along with KuCoin, Mercatox etc. The game changed in Q2, 2019. On February 22, 2019, the Financial Action Task Force (FATF), the top world agency in financial surveillance, came out with a new list of recommendations.

The message was unequivocal: KYC-checks of the crypto exchanges must be as strict as they are for interactions of classical financial institutions.

It didn’t take long to see the results: by the end of March 2019, it was announced that Binance will be collaborating with cutting-edge KYC-providers. The implementation of KYC by Binance was accelerated after last April’s hack of the exchange, which caused the loss of users funds, API data as well as 2FA codes.

So, the well-known agnosticism of Binance is no more: users from 29 countries including the U.S. are geo-locked on the Binance DEX. The restriction started on July 1, 2019. The CEO of Binance, Changpeng Zhao, hinted on Twitter to use VPNs for trading after the restrictions were applied. By the way, those meticulous journalists have already figured out that using VPNs breaks the Binance DEX ToS.

Unfortunately, this scheme (KYC-agnostic service applies more checks after the latest regulations imposed) is not new. The same occurred with Poloniex in May and with Bittrex in June. It wouldn’t be an exaggeration to say that in the world of crypto this is the saddest story yet in 2019 — new jurisdiction ideas result in new headaches for teams and traders.

(De?)centralized

This is pretty much the same story with centralization. For a long time, IDEX was considered to be the leader of the decentralized exchange segment. One year ago, after analyzing IDEX smart contracts, crypto enthusiasts , stated that there are some signs of centralization.

The tension ratcheted up even higher: in the Summer of 2018 there was a particular discussion on Reddit about the nature of IDEX (de)centralization.

As a result, on November 1, 2018, the CEO of IDEX Alex Wearn published a long-winded story discussing the ‘misunderstanding of the word ‘decentralization’, ‘known team’ as the point of centralization, etc. making it clear: his project is centralized.

Mr. Wearn invented the term ‘pragmatic decentralization’ but did anyone feel any better?

This discussion correlates with the concern related to the decentralization of cryptocurrencies, in particular — Ethereum, EOS, etc. The last question is much more complicated: the decentralization of blockchain itself sets a couple of philosophical puzzles. But it seems a totally decentralized way to operate has been found.