Coinbase data scandal sparks calls to scrap KYC
A Coinbase insider scandal exposed 70,000 users’ personal data, triggering debates on rethinking crypto’s KYC systems.
Coinbase’s recent data breach is prompting renewed calls to remove Know Your Customer (KYC) requirements in licensed cryptocurrency exchanges.
Illicit actors bribed the exchange’s overseas customer service agents in December 2024 to gain access to the personal information of 70,000 users. In May, Coinbase admitted that hackers had obtained data such as government-issued ID photos and home addresses.
“All this security theater needs to be abolished asap. Time and again it only benefits hackers and extortionists,” said pseudonymous developer Banteg on X. “KYC actually enables crime.”
However, it’s not feasible for exchanges to simply turn their backs on KYC, as it is a regulatory mandate in several jurisdictions. Meanwhile, privacy-enhancing alternatives like zero-knowledge (ZK) proofs remain limited by cost and technical complexity.
KYC becomes flawed gatekeeper for Coinbase
Coinbase’s latest data scandal places the Nasdaq-listed company on the spot. But the concern applies to all centralized crypto platforms operating under regulatory licenses worldwide. Centralized exchanges now collect and manage passport scans, government IDs, selfies or even utility bills from users who just want to trade.
KYC was designed to curb fraud, money laundering and terrorism financing. But in practice, it’s everyday users who end up exposed while determined attackers find ways around the system.
“Anyone is able to generate a fake US passport or diploma from a leading law school. And 50% of businesses with identity checks are likely bypassable with generative AI,” Ilia Kolochenko, CEO of cybersecurity company ImmuniWeb, told Cointelegraph.
In February 2024, it was reported that people can successfully bypass crypto exchange KYC verification walls by generating passports using AI. Then in October 2024, another AI service popped up to add a video generation tool to bypass crypto KYC checks
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