Watching me watching me
Recently, I attempted to use a regulated cryptocurrency exchange to convert funds into cryptocurrency and make a withdrawal.
Before I could transact, the exchange requested information about the Source of Funds (SoF). This is not unusual. I am accustomed to providing source of funds explanations as part of standard compliance processes.
However, this request went significantly further than normal disclosure. The exchange required formal documentary proof of the source of funds, not just a declaration.
The list of acceptable sources included salary income, business revenue, investment returns, transfers from another exchange or wallet, mining activity, sale of assets, inheritance, gifts, government benefits, loans or credit facilities, gambling winnings, legal settlements, and various other categories.
What made this materially different from past experiences was that each category required physical documentation to substantiate the claim. In some cases, the documentation had to cover a three month or twelve month historical period.
If you could not provide this proof, you could not transact.
If you had funds on the exchange already you lost them.
And even if you did have proof many of these requirements now go even further and demand notarised documentation. For example, if funds originate from inheritance, grants, or gifts, documentation may need to be notarised by a lawyer.
This is not free costing up of $300 and it’s onerous and if you get blindsided by it could cause a delay in month of you getting your funds.
Fine just use another exchange? Well the regulations force ALL exchanges to have these same regulations choice is vanishing forcing people into more shadowy sectors.
This requirement goes far beyond standard Know Your Customer (KYC) verification under global Anti Money Laundering frameworks.
There is nothing positive for the user in providing this level of information.
There is no benefit. None.
KYC is typically required to open and maintain an account. What is happening here is that even after successful KYC, you are required to continually prove the historical origin of your money in order to deposit or withdraw it.
It is far more onerous than what is typically required by traditional banks or financial institutions for routine transactions. Giving traditional banks a significant advantage.
The logical conclusion is that the safest option is to use a broker or intermediary, one that acts as a buffer between the user and the exchange. You provide the broker with cryptocurrency, request execution at a given price, and they handle interaction with the exchange. They become the compliance overlay.
This regulatory push is therefore not neutral. It is actively negative for the sector as a whole. We are back to 2012 where every regulation seemed to low key be trying to kill the industry.
This feels like the industry moving backwards while the defi and non custodial sector powers ahead. So get yourself a private broker and non custodial dex.