KYC in Blockchain

We are living in an increasingly connected world. Digitization is essentially developing operational efficiency for businesses. An initiative has been started by the United Nations, called ‘ID2020’ with the intention of providing every single human on the planet with access to digital identity as a fundamental human right, by the year 2020.

There has been a drive to rethink the concept of identity by the financial services sector, for many years now. Blockchain, with its computing architecture, has the potential to provide ‘self-sovereign identity’ – where the distribution of one’s own identity is controlled by the relevant individual or corporate.

Imagine yourself being 100% sure of your vote being counted. What if your digital identity was no longer represented by a user ID and password? Imagine if the transaction of renting a house, using a car, purchasing an apartment was settled right there on the spot.

What is “Know-Your-Customer”?

A bank or a financial institution typically caters to a large client base in both retail and corporate segments. Know Your Customer or KYC is a process that helps institutions verify the identities of their clients. It is a legal and regulatory requirement that has to be fulfilled by banks for new and existing clients. The typical KYC check includes acquiring a personal information and related proofs, background checks and ongoing changes, and store client details.

The current system requires each institution to do their own KYC. This process results in higher costs for customer acquisition in banks. The process gets repeated all over again if the customer decides to engage with a different bank.

One solution is having a centralized entity and do the KYC process on behalf of the entire industry. Having a central database provides universal accessibility and lower cost of client acquisition. However, having a single point of information makes it much more vulnerable to hacking attacks.

This is an instance where Distributed Ledger Technology (DLT) can prove to be a game changer.

The blockchain is a type of distributed ledger where the data is replicated for all participants in real-time. Using blockchain as a foundational architecture for identity applications would allow governments or banks to provide people with storage for digital identities via an app. Rather than storing that information on a device or cloud storage that is connected to a centralized network – such as a banking or government institution – the blockchain will allow for that information to be replicated across all its nodes and be backed up, immutably across the network and not in a central repository.

Clients submit the KYC to their respective institutions. They can reuse identity checks at different institutions through Know Your Transaction (KYT), and thus speed up account reviews. Their information can be updated at one location and then be pushed out to institutions that they’re working with. Those institutions can validate the customers’ information by comparing it to a cryptographic evidence stored in the blockchain’s distributed ledger. This provides an immutable audit trail that can be relied on by financial institutions, as well as by regulators and other stakeholders.

This way, the identity document is figured out through a one-way cryptographic entry. This helps create tamper-proof details on the consortium’s private blockchain.

Goldman Sachs issued a report highlighting identity management as one of the key areas for blockchain, estimating a sum of 3-5 billion dollars in annual savings with this technology.

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Two different goals for identity compliance

Stopping bad behavior requires gaining access to personal identification data for:

  • Know Your Customer and Customer Due Diligence compliance
  • Anti Money Laundering
  • Counter-Terrorism Financing
  • Tax compliance

To protect privacy, each country has its own data privacy rules which limit access to the same identity data:

  • General Data Protection Regulation (EU)
  • National Data Privacy Laws
  • Consumer Privacy Bill of Rights (US)

For banks, getting either of these goals wrong can prove to be enormously expensive.

Last year banks spent 18 billion dollars on KYC-AML compliance costs and fines. And in the EU, penalties for privacy breaches can be up to 4% of the worldwide revenue.

Multinational financial institutions end up repeatedly conducting identity checks where, sometimes, different divisions within the same banks repeat the same checks. This costs the banks billions of dollars and proves to be a hassle for consumers who are required to provide the same documentation multiple times to different institutions of different parts of the same institutions.

A blockchain-enabled KYC shared ledger platform benefits all stakeholders by:

  • A private and immutable ledger that enables sharing of KYC information across banks in a transparent and secure manner. (New ERC-1404 Security Token Standard Could Spark STO Explosion)
  • Reduces customer onboarding time and enhances the customer experience
  • A single source for customer data reduces the potential for fraud by inhibiting data ambiguity
  • Enabling greater transparency
  • Reducing operational inefficiencies
  • Enabling up-to-date customer data

There is a requirement by the law for banks and financial institutions to clearly identify and create a risk profile for each customer. Multiplying cost savings across the industry will be the focus of the KYC Utilities Blockchain Model of the future – which will, in turn, present the leading KYC utility with a self-perpetuating market leadership or potentially decentralize or disintermediate them in the process. Standardization and automation of policy and operations are some of the most exciting areas where we will see different technological approaches – starting with blockchain and expanding to AI, RegTech and FinTech solutions.

Is KYC a requirement in Blockchain trading, according to you? Let us know in the comments below.

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