Solving the KYC/AML problem using Blockchain Technology

Beginner’s Guide / 14.04.2020

Why do we need KYC/AML?

Know Your Customer (aka KYC) is the regulatory and compliance obligation for the conventional banking and financial system to capture customer information before onboarding and providing any financial services. In banks, KYC is embedded into the account opening forms, which mandate customer to provide accurate information and ideally update as soon as any change occurs in the KYC data.

Similarly, other financial institutions such as Stocks, Mutual Funds, Insurance companies etc. also require the KYC information from their prospective customers. Primarily KYC helps financial institutions prevent identity thefts, money laundering, terrorist financing, and profiling and eliminating the runaway creditors.

In today’s global economy, we live in a world where the user is in full control of their identity and are the sole authorizer to whom they may share their information. Know-Your-Customer has become pivotal in the digital world and large financial institutions need to identify ways to trust foreign banks and have more transparency into recipients’ profile.

The Flaws in the System

Irrespective of the severity of the use case, establishing identity through Know Your Customer or KYC verification, is a prolonged procedure. In addition to huge amounts of paperwork associated with undertaking such procedures, a lack of transparency regarding the use of the personal data collected from customers has led to inefficiencies in collating data between parallel systems.

Conventional Banking and Financial institutions spend a substantial part of customer acquisition cost on operating resident and isolated KYC databases and try to keep them updated and accurate. The overall cost of KYC increases due to lack of transparency, poor control, mistrust and data duplication. Not to forget the fact that KYC related compliance has to be done every time a person enters into a relationship with another institution. There is little to none interoperability among institutions to share KYC related data.

Solving Compliance through the Blockchain

Blockchain technology allows for the creation of a distributed ledger that is then shared to all users on the network. This means that blockchain databases have an inbuilt immutably that makes the data that they contain far more trustworthy. If the financial services sector, for example, implements blockchain for KYC verification, they will be able to verify users quickly and reliable, via an app etc. Due to the reliability of blockchain databases, government institutions and companies could rely on the data completely, something which would remove the need for any further ID checks.

With the help of a blockchain based infrastructure, we can develop a unique self-sovereign decentralized Know-Your-Customer (DKYC) model. This model can help enhance customer privacy through consent-based access, featuring regulator governance. It can also help banks to use trusted and accurate customer data while reducing the customer acquisition costs.

The open areas for research are: to address challenges such as fraud protection using artificial intelligence, creating the devices identity, dApps application models, on-chain/off-chain oracles, performance throughput and the blueprint for decentralize score-based KYC.

Everything from the immutability of blockchain databases to their ability to help improve transparency in customer identification will massively help improve the process and reduce fraud.

Government bodies will also benefit as risk officers will have better access to data so the relationship between the financial sectors and regulators will be more transparent. This provides the provision for a massive reduction of financial fraud and crimes in the long term.

KYC Blockchain Project – KYC-Chain

With a little research, it can be found that most countries follow a similar KYC/AML framework, all taking its roots from either the European or the American standard of compliance. Currently, most organizations have an inefficient system of asking for KYC/AML documents separately, each time a new customer comes in.

KYC-Chain

The KYC-Chain project is an “all-in-one workflow solution to verify your customers’ identities, streamline a KYC on-boarding process and manage the entire customer lifecycle.” Built on the blockchain, KYC-Chain forms an innovative solution to the age-old verification problem. It has packages that serves both the individual as well as the organization. As of April 2020, KYC-Chain has been involved in about 500,000 on-boarding verifications, and covers about 200 countries.

With the help of KYC-Chain, organizations can out-source their compliance processes to an automated process. KYC-Chain can also be used for interoperability, meaning that once an individual finishes the KYC process, they do not have to do it again and again. They can just share their KYC-Chain credentials.

KYC-Chain also supports biometric authentication, cloud storage, APIs, Auto data extraction and myriad other services, all of which are secured by the blockchain.

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Sudarshan M is a long time crypto-enthusiast. Pulled in by bitcoin early on, it did not take long for Sudarshan to divert all of his academic attention from business studies to blockchain by doing his Masters and eventually pursuing his PhD in the subject.