Since the ledger is public, it can be analyzed for patterns from the individual transactions. The more transactions there are involving a certain party, the more likely an outside observer will be able to piece together identities for that party's overall network. KYC exchanges accelerate that process.

Crypto projects like Monero (XMR) do not have this flaw, as deducing the identities of parties from the public ledger is computationally prohibitive.