When a new user buys bitcoin using a regulated, know your customer is being provided to his local government.
This is obviously dangerous, especially if you live under an authoritarian government.
This calls for a privacy standard in Bitcoin: Where a majority of wallets enable privacy features by default, making it much harder for chain analysis firms to link transactions and wallets to real-life identities and/or previous transactions.
They do it using publicly available on-chain data and then cross reference it with other data, such as KYC records, in order to establish a deterministic link between a user’s wallet activity and his real-life identity.
The worst thing about those companies is that they don’t work exclusively for governments, they work with whoever is willing to pay them.
There are plenty of users that are targeted by these companies simply because they stated they hate the idea of chain surveillance; a good example for this would be DarkDotFail’s donation address being flagged in multiple exchanges that have a partnership with these companies.
Many will just avoid talking about it, and some don’t even know it exists! Creating such a standard would require large community consensus, not because we need to change the protocol, but because we need to make people acknowledge the fact that their privacy is being compromised.