Apart from data analysis, which is carried out alone or in cooperation with private companies, authorities can request information from central exchanges. Regulations may also oblige centralized exchanges to share such information. However, not all cryptocurrency exchanges work with authorities.
A centralized exchange is a cryptocurrency exchange operated by a single entity such as Coinbase. In order to become a licensed operator in a specific country or territory, centralized exchanges must comply with regulations.
For example, to reduce cryptocurrency anonymity and illegal cryptocurrency use, most centralized exchanges have built-in Know Your Customer (KYC) checks. KYC is designed to verify customers’ identities and help authorities analyze activity on the blockchain. In practice, individuals must submit a series of documents and their details before they are allowed to trade, invest and conduct business.
After KYC has been performed, an exchange may be requested or required to share this data with law enforcement agencies. Because the exchange holds personal and transactional data of individuals, so can the government. Using information sourced from centralized exchanges, the IRS can identify unknown bitcoin wallets using KYC checks and appropriate personal information.
Still, not all exchanges use KYC. For example, decentralized exchanges (DEXs) are difficult to adapt to the regulations because they are not headquartered and operated by a centralized company or a small group of individuals.
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