Perpetually KYC'd Coins Using Evil Covenants

In the discussion of the effectiveness of Know Your Customer (KYC) protocols in mitigating the risks associated with compromised accounts within digital currency systems, several critical points emerge. Firstly, the implementation of KYC processes alone does not inherently prevent the misuse or abuse of accounts, nor does it stop the potential movement of stolen funds to downstream accounts. The ability to quickly identify and "blacklist" compromised accounts is essential in halting the movement of illicit funds. This action mirrors the practice by stablecoin issuers who freeze assets in response to hacking incidents, highlighting the importance of timely intervention.

Further scrutiny reveals that without additional measures, such as rate limiting on transactions, KYC's effectiveness in theft prevention remains questionable, especially concerning large transactions which are most susceptible to unauthorized fund drains. The practical challenges faced by traditional financial institutions (tradfi) in enforcing transaction limits demonstrate that even with comprehensive KYC protocols, significant vulnerabilities exist. These tradfi experiences, where victims have circumvented safeguards and suffered substantial financial losses, underscore the limitations of relying solely on KYC for security.

Moreover, the integration of smart contracts into these systems does not inherently resolve the underlying security issues. Managing keys, particularly hot keys essential for system operations, presents a significant challenge, complicating efforts to ensure both security and system performance.

Despite these challenges, governments have experience managing Public Key Infrastructure (PKI) systems at scale, including those required for secure communication on government websites. However, the deployment of Central Bank Digital Currencies (CBDCs) ventures into relatively untested waters, leaving open questions about how authoritarian regimes might leverage cryptocurrency technology for surveillance or control. This uncertainty underscores the need for ongoing evaluation of digital currency management practices and the development of robust frameworks to mitigate the risks of misuse and abuse.