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We dive deep into the KYC process, an accountability measure many projects are considering.

Disclaimer: This is purely my own opinions. These opinions are for entertainment & education purpose only and are not financial advice.

Background: Cryptocurrency, one of the trendiest markets you could find today, going with its rapid growth in the past years when Bitcoin — the current most well-known cryptocurrency skyrocketed its price to 64,000$ in May of 2021 and 69,000$ in November of 2021.

Opportunity: Many crypto enthusiasts worldwide see the opportunity in the new high-risk, high-reward market and take it. Be it an investor, a developer, a daily trader, or even ape/degen (people who invest a large sum of their money into a project(s) without proper research beforehand).

The reward and risk: There are many ways to give your portfolio to be doubled, tripled, decupled (x10), centupled (x100), or even millupled (x1000), but as much as the reward can be, the risk is as low as it can get in the sector of this market.

And that’s what I’m going to discuss mainly in this article, the risk of investing in a new cryptocurrency project without much conclusive information.

What is a DAO: A decentralized autonomous organization, or DAO, is an organization that codes instead of leaders govern. (Read more)

What is KYC: The Know Your Client or Know Your Customer (KYC) verification is a set of standards and requirements used in the investment and financial services industries to ensure they have sufficient information about their clients, risk profiles, and financial position. A TLDR is to know the risk coming from the founder(s) of a new project you’re investing in. (Read more)

Why do we need KYC:

  1. The Investor/Partnership’s side: To know if the founder(s) of the said project is a legitimate person with no criminal background or any bad reputation in the past. Another reason is to have an entity held the responsibility before the judicial system if the said project turned out to be a rug pull (a malicious act in which crypto developers abandon a project and run away with project funds), or it’s a hard or a soft pull. And the last reason is to see the founder(s)’s willingness in the project itself. Doing a KYC won’t help the founder(s) much, but it shows they’re betting against their own identity if the said project fails.
  2. The Founder(s)’s side: To gain trust within the investor/partnership community, especially in the early stage of the project, in which the relationship between the founder and the investor/partnership is relatively low in this space. Aside from that, they won’t be receiving any other significant benefits.

How does KYC work: Since this is the crypto world, AKA the anonymous (someone whose identity is not known or not made public) world, a KYC process is straightforward for most firms.

Let’s me demonstrate the most common KYC process in this space:

  1. The founder(s) of the said project contact a 3rd party KYC service through any means of communication.
  2. The 3rd party KYC service will ask the founder(s) to summarize their project and have a quick review.
  3. Assuming the review has gone through, the 3rd party KYC service will send out their terms and conditions, requirements, and agreements for the upcoming KYC.
  4. Assuming the founder(s) agree to their terms and conditions and are willing to provide the said requirements. The 3rd party will begin their KYC verification:
  5. The required documents for KYC (government-issued ID card, passport, or drivers license) will be sent to another 3rd party software (mainly services that have been in the banking industry which have vast data of their customers) to check their record automatically for any criminal record(s), bad credit record(s),…
  6. The founder(s) will begin doing the Identity Verification themselves with the help of the provided software from the 3rd party. Most software nowadays would only be limited to Face Recognition. While it’ll ensure to keep out most of the AI-generated image, the DeepFake technology can still bypass this (at the time of writing for this article).
  7. After completing the above two steps, the 3rd party will manually check the documents required for KYC to prepare for the last step.
  8. The 3rd party will then check the founder(s) manually through Zoom, Google Meet, Skype, or similar software to perform a live meeting between the two entities. The 3rd party then presents the founder(s) a list of questions they have to answer or perform a specific action. This step ensures that the person on the live meeting is not AI-generated and confirms that the said project’s founder(s). It’s not 100% guaranteed, but it’s one of the best practices for KYC in the crypto space.
  9. Should every step pass, the 3rd party will begin to draft their verification for the project, and it should be the end of the KYC process.
  10. While this is the most common way to do KYC in the crypto space for the founder(s) of a project, additional steps could be taken to ensure the quality of the KYC. One example is from RugDoc. (Read more)

The illusion of KYC: While many investors in this sector think a KYC from a trustworthy firm is a rug-free guarantee, I would argue otherwise. From my finding and self-experience (this might not be very objective), around 5–10% of a KYC-ed project would rug pull, and another 20–40% of the said project won’t perform well later on. KYC is a tool to make an entity held responsibly and to show the willingness of the founder(s). It’s not a quality checking tool to see if the project is a potential one or not. You would need to check on their code, smart contract, partnership, tokenomics, roadmap, and marketing strategy, and any factor that is the product itself for this one.

What if a KYC-ed project got rugged: In a scenario of this happening, most firms that did KYC for the said project will begin investigating the project after the rug pull happens. Depending on each firm policy, they will choose to announce whether the project is a rug to the public or not, but they will all have to release the KYC information to local authorities if requested by them. And to be frank, most firms won’t release the KYC information to the public since it would cause a witch-hunt (trying to find someone to target and humiliate) among the victims.

Will the victims get their funds back: Another critical thing to consider is that the entity holding full responsibility for the project will most likely not refund everyone even if they are caught up in the judicial system. There’s no guarantee you will get your money back, and in most cases, it would cost the victims more money and time to file a lawsuit against the founder(s). Most firms will not file the lawsuit and will not fund the suit itself. It’s up to the victims to fend for themselves.

Limitation of KYC: As I explain the most commonly used KYC process above, we could see the KYC only provide the identity of the founder(s) but not their background, ability, reputation, and in some case, a project would only need one core team member to do the KYC to acquire the certification. It’s a limited tool from the beginning. The idea of crypto itself is to be anonymous, so KYC is in this space would mostly count as the founder’s willingness of the founder(s) to do KYC, but the information holds little value to determine the product.

Will the KYC-ed rugger(s) get away with the fund: Possible, since the KYC in this space isn’t perfect from the beginning, especially ruggers lives in remote regions or regions without a proper law regarding crypto, or there’s not enough evidence to present the said person is the rugger.

Demonstration of a KYC-ed Rug Pull: Let me demonstrate some of the possible KYC-ed Rug Pull:

Soft Rug with KYC-ed:

  1. Begin your project.
  2. Hire good designers, good website developers, and good marketers for your project.
  3. Engaging in social media.
  4. Be friendly and transparent as much as possible.
  5. Grow the community.
  6. Complete your KYC with a trustworthy 3rd party.
  7. Begin coding the smart contract without putting any code lines representing a hard rug.
  8. Ensuring presale and launch went smoothly.
  9. Put the market plan in action for another 3–6 months.
  10. Begin your soft rug slowly, day by day patiently.
  11. Remember to keep communication tight with your community, either yourself or recruit volunteer moderators.
  12. Keep saying you’re working on something big but not working on anything aside from keeping the marketing plan going.
  13. Within the first month, someone will notice it as a soft rug. That’s normal. The moderator team and the loyal members of the community would still support the project due to the marketing.
  14. After six months, you could officially announce that the project is abandoned due to conflict within the team or any legitimate reason that would seem reasonable. You could also choose never to disclose it and leave it with the fund.
  15. In most cases, tracking a soft rug is quite tricky for anyone. It would take a team of experts on the matter.
  16. If bad luck isn’t on your side, you have completed a soft rug.

Hard Rug with KYC-ed:

  1. Begin your project.
  2. Hire good designers and good website developers.
  3. Engaging in social media.
  4. Be friendly and transparent as much as possible.
  5. Grow the community.
  6. Complete your KYC with a trustworthy 3rd party.
  7. Create 2 Monero wallets and store only the second wallet’s mnemonic seed on paper.
  8. Begin coding the smart contract with function(s) for a hard rug.
  9. Explaining the “false” reason why you put the function(s) in the contract only hours before the presale.
  10. Put your whole Discord server in a slow mode, don’t delete it.
  11. Begin to pull the hard rug, quickly convert the fund into Monero, and transfer it to your first Monero wallet.
  12. Now transfer the said Monero to your second wallet.
  13. Delete every trace you have on the internet: Discord server, Website, Twitter,…etc.
  14. Begin to destroy any devices involved in the project, ensuring everything must turn to dust from start to finish.
  15. Buy or get a new device, input your mnemonic seed on paper. You should be able to recover your second Monero wallet, which is untraceable back to the project or the hard rug itself. (Read more)
  16. By then, the 3rd party KYC firm should be alerted of the hard rug and begin to release your identity to the local authority. You would get blacklisted by the firm as well.
  17. If you get checked or arrested by the authority due to a lawsuit against you, remember to say you got hacked, and the person triggering the hard rug isn’t you.
  18. Now expect your house to get a warranty for searching. The authority will find nothing if you destroy every device involved with the project to dust. While the lawsuit can still go on, there’s barely any conclusive evidence to support your action of triggering the hard rug itself.
  19. This should be the end of it, except for the legal system in some regions. You will have to prove the said source of your Monero if you do ever transfer it to cash. You could move to a crypto haven country and make the Monero into legitimate money.

Where are we: We’re at the beginning of the cryptocurrency market, no significant regulations have been implemented into cryptocurrency (at the time of writing for this article). Security service, KYC service for this sector is still primitive.

What KYC should have been: For KYC in the banking industry, the business industry, it’s better since there’s plenty of data and background of a person is available for the checking compared to this sector. So for the crypto world, a quality KYC can’t be a one-time check, but it should be a continuous process to get as much data as possible. Doxxing to a trustworthy member of the crypto community is one way.

Where do we start: For now, all I want to say in this article is that KYC won’t be a one-way ticket to a successful project, remember to include multiple factors, and the most crucial factor is the smart contract itself above all else.

If you have any feedback regarding my article, feel free to agree, disagree with it, and join me in discussing the matter further. Thanks.

Article written by Yubuki

My Contact:

Discord: Yubuki#3616
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