Centralized Exchanges’ KYC Compulsions Attributing to Ballooning DEX Trading Volume

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Tightening government regulations are forcing centralized exchanges like BitMEX to comply with user identification protocols. Traders looking for anonymous trading are flocking to decentralized exchanges (DEXes) leading to increasing volume.

Robust ID Verification Coming to BitMEX

According to a press release issued by BitMEX on Friday (August 14, 2020), the crypto derivatives giant will begin a robust user verification program on August 28. The plan is to have all BitMEX customers complete their ID verifications within six months from the start of the exercise.

The revamped know your customer (KYC) protocol will involve uploading user ID documents, photo identification as well as residential address details. Customers will also have to declare their source of trading funds.

According to the crypto derivatives exchange, the move is part of efforts to “create a more trusted and secure trading environment for all BitMEX users. The process will reportedly take only five minutes to complete with BitMEX assuring users of prompt response from the team should any issues arise.

Explaining the need for the upgraded verification process, the BitMEX announcement reads:

“Today, user identity verification is increasingly expected in order to meet evolving international regulatory standards, and is an important part of building trust in the cryptocurrency ecosystem. Practical customer security is greatly enhanced by identity verification, allowing BitMEX support personnel to reliably verify the actual owner of an account in the event of a dispute, hack, or incapacitation.”

KYC Requirement on CEX Platforms Will Drive DEX Adoption

By adopting robust KYC, BitMEX is no doubt bowing to increasing regulatory pressure. The platform has been the subject of numerous controversies and lawsuits with some regulators in the UK warning that the platform was not authorized to operate in the country.

However, by bending to the will of regulatory agencies and adopting KYC, BitMEX risks losing market share to DEX platforms that offer derivatives trading. Indeed, the overregulation of centralized exchanges is causing a noticeable migration of decentralized alternatives.

With token swaps occurring directly on the blockchain DEX platforms do not require KYC since there is no interfacing with banks as is the case with centralized exchanges. In July, DEXes recorded almost 4% of the volume seen on their centralized counterparts with this ration expected to increase especially with the growing popularity of decentralized finance (DeFi).

Such is the extent of the growing popularity of DEXes that their tokens are besting the native tokens of centralized exchanges in terms of annual returns.

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