Why Is Blockchain a Good Solution for KYC Verification?
With the advent of blockchain technology, many traditional systems are now due for an overhaul. The promise of this exciting new database technology cannot be overstated.
While some experts might dispute this claim, blockchain has already demonstrated its potential, having underwritten a revolutionary new set of currencies, which with proper regulation, have the potential to become the new global currency system.
A long list of other industries also stand to benefit from blockchain implementation. The ability to link blockchain-based applications to smart contracts has the potential to massively improve on existing systems and in turn, save companies huge sums of money.
KYC as we know it today
Identity can be easily established by government-issued documents such as driver‘s licenses, social security cards or passports etc. However, a major challenge lies in establishing the authentication of other identification sources. Also, flaws in the security of such systems has led to repeated instances of financial fraud and money laundering etc.
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.
Global efforts to combat financial terrorism and money laundering have proved to be incredibly expensive for both governments and financial firms. Recent reports highlighted that in 2014, firms spent an incredible $10 billion on AML (Anti-Money Laundering) compliance alone.
Since firms are also penalized for failing to comply with KYC regulations, through hefty regulatory fines etc.
The winds of change – KYC Blockchain
Although the financial services sector has been seeking solutions for the “identity‘ problem for a long time, it is only now that a viable solution has arrived in the form of blockchain.
A decentralized computing architecture, blockchain will allow for the accumulation of data from multiple authoritative service providers into a single immutable, cryptographically secured and validated database.
What is KYC Blockchain?
Blockchain technology allows for the creation of a distributed ledger that is then shared to all users on the network. This factor means that there is no one single authority and therefore a point of weakness, as in the client/server model.
This means that blockchain databases have an inbuilt immutably that makes the data that they contain far more trustworthy. Such databases can be used to store ID details of individuals which would be completely 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.
Here‘s how a KYC Blockchain application would work.
An institution, a bank, for example, sends a request to the blockchain platform to access your identity data.
In this new architecture, data access would be solely based on user consent. To grant consent, a user only has to log in, probably through a One Time Password (OTP) and allocate a private key to the data. Although the data can now be accessed by a third party (the bank in this instance), ownership of the data remains with the user.
The concept of the Blockchain-based KYC platform is already being implemented by IT giants like IBM. The Shared Corporate Know Your Customer (KYC) project assures an efficient, secure and decentralized mechanism to validate, collect, store, refresh and share KYC information for customers.
How can Blockchain help with KYC verification?
In the future, blockchain-based KYC utilities will help bring cost savings to any industry that relies on identity verification. This is because the technology will allow banks and other financial organizations to rely on a more secure organized unified model of data handling.
Let’s take a closer look at where the benefits lie.
Distributed user data collection
A KYC utility system based on blockchain technology will enable the financial and banking sectors to emancipate the process of identification verification.
This is because presently, our data is collected and stored in a centralized system, such as a repository. Access to this data requires KYC providers to share their client data with the companies needing to access it.
With the introduction of blockchain solutions to handle the KYC process, data will be available on a decentralized network and can, therefore, be accessed by third parties directly after permission has been given.
This blockchain-based KYC system will also offer better data security by ensuring that data access is only made after a confirmation or permission is received from the relevant authority. This will eliminate the chance of unauthorized access and subsequently give individuals greater control over their data.
Automation and standardization of policy/operations
Client data collection occurs on a daily basis among different organizations, businesses, and other institutions. From bill payments to booking tickets, our data (specifically name, address, social security number, etc) is required for nearly all aspects of daily life.
Taking into account the recent progress achieved on KYC policy standardization and the ever-increasing amount of data being collected, it is now possible for blockchain solutions to make use of smart contracts for the execution of control and operational processes.
KYC workflow routing can be coded into smart contracts and standardized across the industry, thereby streamlining the procedure. This will increase the effectiveness of the blockchain-based KYC system, as it would reduce the need for manual oversight.
Improvement in digitization techniques will also enable the implementation of multilingual solutions, with the help of translation tools and smart contracts.
Centralization of controls and risks
The financial sector can reduce risks by limiting the extent of human input. This can be achieved through standardization within the industry. Data owners will also be able to maintain oversight, as they will be required to directly authorize a company to access their data. This will also help to reduce the likelihood of mistakes or fraud.
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Blockchain enables key regulatory concerns such as the AML risk ratings processes conducted by banks to be automated. This will help limit banks’ risk exposure and therefore help to mitigate risk.
Blockchain, therefore, has the potential to bring about a big change in the way banks consider identity security and access.
Governance and data quality
Blockchain offers a robust hurdle against fraud. Once entered, data on the blockchain ledger cannot be altered. Data stored on the blockchain is secured by cryptography and cannot be altered without agreement by more than 51% of the network.
The current client/server system of data storage in financial institutions operates a silo-based system. This means the banks store the data on their servers for when it is needed. Data can only be accessed via the banks’ internal system and not by any outside party. This means that the ID verification must be conducted by every single institution that is required to meet KYC regulations.
A blockchain solution, on the other hand, would allow the creation of a ledger that would allow the data to be stored on a single, universally accessible platform. Data could, therefore, be accessed by anyone with authorization.
This would lead to an improvement in data governance that could help institutions identify fraud earlier etc. This would help prevent many of the financial crimes that banks face today and help them avoid hefty fines that are brought about as a result of compliance failures.
Communication and Transparency
Blockchain-based KYC platforms will allow for the active monitoring of everything from account openings to day to day transactions. When combined with smart contracts that will have predetermined criteria to spot fraudulent activity etc., these new platforms will be able to alert banks to any wrongdoings.
The immutability aspect of blockchain is also quite handy in the context of creating trust between parties involved in the KYC process. The ability to trust data stored on a blockchain removes the need for secondary validation processes or cross-checking.
Finally, a distributed ledger system makes the reporting and communication processes more efficient, saving time and money. Since parties can easily access reliable data, processes, mistakes. and fraud can be detected far more quickly.
This is particularly true when it comes to mistakes, which with conventional systems, take a lot of time to be identified, reported, and solved.
Suspicious Activity Reporting
Currently, the banking KYC process takes days or even weeks. Due to this, the cost incurred by financial institutions in maintaining regulatory compliance is escalating rapidly as the industry tries to stay ahead of financial fraudsters or terrorists.
With a shared ledger, where numerous financial institutions are maintaining the ledger, the process of KYC could be easily adjusted and monitored by all parties. Any change or update to a client’s data would be available to all parties.
Having direct access to a shared ledger would help institutions save on the time-intensive process of having to identify a scam and reporting it etc.
Comprehensive Authentication Process
A cryptographic verification solution will help financial institutions quickly verify the identity of individuals. This is essential for data protection compliance as well as fraud prevention.
Meanwhile, the increasing demand for banks and other financial institutions to create apps to allow users to conduct online banking also poses new challenges. Security flaws presented by bugs or theft of our smart devices has created a need for a more secure decentralized solution that will address the security concerns of users.
The security offered by blockchain’s decentralized model makes the chance of fraud much less likely. While it might be possible for a hacker to access some sensitive information should the device be stolen, they would not be able to change the data thanks to the immutability of the blockchain.
KYC Blockchain – The Scope of Application
The application of KYC blockchain solutions is not limited to banks or financial institutions. There is a wider scope of application among industries that require authenticated user identification.
The KYC registry on a blockchain could be accessed by many industries in addition to banks and other financial institutions. Many of these small companies and organizations require these data for different purposes such as verifying identifications before issuing membership cards etc.
Tax authorities could also access it to speed up their internal processes. Other industries that require user data from such registries include judicial, credit rating agencies, stock exchanges and so on.
KYC on blockchain has the potential to be a billion-dollar industry. As I have already highlighted, technology giants like IBM have already invested in a massive blockchain project that is being built with the help of HSBC, Deutsche Bank, the Treasuries of Cargill.
I have shown that blockchain technology can help improve KYC in many ways. It is clear that companies such as IBM have already recognized the advantages that this new technology processes over existing systems.
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.
Only time will tell what the true impact of blockchain technology will be. What is clear that the promise of this new technology has us all on the edge of our seats.