KYC in Blockchain
We live in an increasingly connected world. Digital is helping develop operational efficiency for business. The United Nations have an initiative ID2020 to provide every single human being on the planet with access to digital identity by the year 2020 as a fundamental human right.
The financial services sector has been trying to rethink the concept of identity for many years. Blockchain is a new computing architecture which has the potential to deliver 'self-sovereign identity' - where the relevant individual or corporate controls the distribution of their own Identity.
Imagine if you were 100% sure that your vote was counted. Imagine 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.
A bank or a financial institution typically caters to a large client base in both retail and corporate segments. Know Your Customer (KYC) help institutions verify the identity of their clients. KYC is a regulatory and legal requirement that has to be fulfilled by the banks for both 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. Current system requires each institution to do their own KYC. This translates into higher cost of customer acquisition for the banks, also should the customer wish to engage with a different bank the process gets repeated all over again.
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.
Here is where the distributed ledger technology can be a game changer. Blockchain is a type of distributed ledger where all data is replicated for all participants in real-time. To use blockchain as a foundational architecture for identity applications would allow governments or banks to provide people with digitally-stored identity via an app. Rather than centrally storing that information on the device, at the bank/government location or even centrally in the cloud, blockchain allows that information to be replicated across the chain and therefore backed up, immutably across the network and not in a central repository.
Clients submits the KYC to the institution they want to. Clients can reuse identity checks in different institutions through KYT (Know Your Transaction) and speed up account reviews. They can update their information in one location which can be pushed out to the institutions where they are working with. Those institutions can validate the customers’ information by comparing it to a cryptographic proof that is stored in a shared blockchain ledger. This provides an immutable audit trail that can be relied on by the financial institutions and also by the regulators and other stakeholders.
This way blockchain should contain a one way cryptographic proof and should not go backwards and figure out what the identity document is in the first place.This creates 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 and they have estimated between 3-5 billion dollars of annual savings with this Technology.
Two different goals for identity compliance
To stop bad behaviour it requires lots of access to personal identity 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 limits 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 be enormously expensive.
Last year banks spend 18 billion dollars in KYC-AML compliance costs and fines. And in EU penalties for privacy breaches can be upto 4% of the worldwide revenue.
Multinational financial institutions end up repeating the identity check over and over again and sometimes even the different divisions within the same banks repeats the same checks. This costs billions and has enormous hassle for consumers who have to provide the same documentation multiple times to different institutions or different parts of the same institution.
A blockchain-enabled KYC shared ledger platform benefits all stakeholders by:
- 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 customer experience
- A single source for customer data reduces potential for fraud by inhibiting data ambiguity
- Enabling greater transparency
- Reducing operational inefficiencies
- Enabling up-to-date customer data
Banks and financial institutions are required, by law, to clearly identify and create a risk profile for each customer. The KYC utilities blockchain model of the future will focus on multiplying cost savings across the industry, which will in turn present the leading KYC utility with self- perpetuating market leadership or potentially disintermediate them in the process. Standardisation and automation of policy and operations is one of it’s most exciting areas where we can see different technology approaches (including blockchain) but also expanding to AI, RegTech and Fintech solutions.