First, we must consider a known and trusted exchange before we use it.
From the start, we know that we submitted our personal information into a legitimate exchange.
But do they handle this process themselves, or are they hiring other companies to check your details? And how safe is your information once you hand it over? Some platforms also set limits on your account if you haven’t completed KYC.
They have staff to check it, AFAIK, it will be handled by other parties if someone asks them, like law enforcement, if fraud is linked to an exchange, in that way, it will be easier for them to solve the case.
Another one is the regulators and authorities for the tax reporting.
If you’re curious about these things, it’s fair to ask of course: Why does the exchange really need your data, what do they do with it, and who actually gets to see it? These are important questions to ask for anyone using a crypto exchange today.
It's simply to avoid money laundering since crypto is commonly used by bad actors.
AML sometimes helps those hackers to track them down.
But if you're afraid of all of these, why not use a decentralized exchange where data and information aren't needed at all?