Know your customer (KYC) and anti-money-laundering (AML) regulations require banks to know who they’re doing business with and ensure that they’re not participating in money laundering or terrorism. Banks issuing cryptocurrencies still have significant challenges to overcome first with identity assurance. In order to stay compliant with KYC and AML regulations, they need to know the identity of all the individuals utilizing their currency. In many cases, people’s bank accounts are already debit and credit service of transactions, like distributed ledgers in blockchains, except for centralized. The first candidates in this area are going to be regions where regulators, banks, and central banks work together. Singapore and Dubai are good candidates that already have blockchain initiatives. In centralized applications, humans verify user identity by requesting the user to submit certain scanned documents, OTP verification, and so on. This process is called know your customer (KYC).
The Problem associated with Current KYC Process
A bank or financial institute typically caters to large client base in both, retail and corporate segments. The ‘know your customer process’ better known as KYC helps institutions identity assurance of their clients. KYC is the regulatory and legal requirement as a part of the due diligence protocol, that has to be fulfilled by the banks for both new and existing clients. The typical time-consuming KYC check includes acquiring a personal information and related proofs, background checks and ongoing changes in store clients’ details.
The current system requires each institute to do their own KYC. This translate 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 centralized do the KYC process on behalf of the entire industry. A central database provides universal accessibility and lower cost of clients’ acquisition. However, having the single point of information makes it much more vulnerable to hacking attacks. Here is where the distributed ledger technology or blockchain technology can be the game changer with its records keeping and management system.
Digital Identity Management
Blockchain based shared KYC solution enables users to reuse their identity assurance to multiple providers. Once you are verified by the bank your information is stored on the blockchain and you receive a token that can use to share your verified information with other providers. You can now use this token to prove your identity to all kinds of providers from telecom operators to the insurance provider and other. Everything secure and in complete privacy. This can help your business by lowering KYC costs providing a better customer service and offering a new service for your partners.
Blockchain-Based KYC Application
You can log in names of the KYC app using the credential provided by your bank. You can select the bank you want to submit your KYC documents to for identity assurance. Once the documents are uploaded for verification, a pending transaction alert appears on the agent’s terminal of the bank. Once the necessary due diligence is done on the application the agent can approve or reject the application. Upon approval, the transaction is sent to the validating peer on blockchain for execution. Once the transaction is successfully added to the blockchain, a unique address is generated where the information is stored in the ledger. This creates a unique tamper-proof record of your details on the consortiums private blockchain. A notification is sent to you out, indicating that your KYC checks are complete and details have been added to the blockchain.
Let us assume that, you also choose to avail the services of other bank or totally different service provider. Here is where blockchain solution can help reduce redundancy and costs much better than any existing system. Rather than requesting resubmission of your documents the service provider requests you for KYC ID. This ID uniquely verifies an identity assurance you on blockchain much like the public key. The service provider sends you a request to overview your KYC documents on the blockchain. Simultaneously you receive the review request on your KYC app and by approving it you are allowing the service provider to access your KYC information that was recorded on the consortium blockchain by the Bank. The blockchain solution offers cost control and KYC process optimization, helping banks scale new heights in today’s digital domain.
When it comes to anti-money laundering (AML), there is in its early days, naysayers often condemned bitcoin as a tool for laundering money or buying illicit goods. Critics argued that, because the blockchain technology is decentralized, lightning quick, and peer to peer, criminals would exploit it. Although, authorities, in general, believe that the blockchain technology could help law enforcement by providing a record of suspicious activities, maybe even solving a multitude of cybercrimes, from financial services to the Internet of Things.
Number of digital identity products has already been developed which are based on blockchain technology that not completely eliminates the problem of KYC but make transaction easier and hassle free world wide. We at 1kosmos have our flagship product called BlockID which is quite prolific and powerful contestant in race of solving the problems regarding digital identity and other KYC problems.