A similar concept of the blockchain-based KYC platform has already found practical implementation. The most famous example is the joint project of IBM, Deutsche Bank, HSBC, the Mitsubishi UFJ financial group (MUFG) and the Treasuries of Cargill, which provides an efficient, safe and decentralized mechanism for checking, collecting, storing, updating KYC data and sharing them.
How blockchain will improve KYC
KYC utilities based on blockchain technology will help save money and increase the security of personal data in any industry where identity verification is needed. Let's take a closer look at exactly what the advantages of such systems are.
User data collection
How it is. Currently, the financial, banking, government and other sectors collect and store personal user data in centralized systems (repositories). Every time someone needs access to this data, they are sent from the repository of the KYC service provider to the devices of the company that requested access to the data.
How it will be with the blockchain. Personal data will be collected by individual participants (banks, government agencies, companies or users themselves) and stored in a decentralized network. Access to the data will be provided directly by users or third parties who will have appropriate permission to do so.
In this case, it will be possible to provide access not to the personal data of the user, but to a special identification card that certifies the successful completion of the procedure. Thus, personal data will be protected, and third parties will be able to verify the identity of their client.
What are the benefits:
- enhances the security of personal data;
- gives people more control over their data;
- eliminates the possibility of unauthorized access to data;
- complies with new laws on personal data protection, for example, the new EU regulation General Data Protection Regulation (GDPR).
Automation and standardization
How it is.
KYC data is collected and exchanged daily among various organizations, enterprises and other institutions. Typically, data passes through several intermediaries that use different communication protocols, APIs, and management systems. Moreover, this also involves people who verify and certify information, as well as give permission for certain transactions. As a result, this architecture inevitably generates a lot of errors, inconsistencies and critical vulnerabilities for unauthorized access.
How it will be with the blockchain. Routing of working KYC processes can be coded into smart contracts and standardized for all industries. In such an ecosystem, data exchange will be as reliable as cash transactions in cryptocurrency payment systems Bitcoin or Ethereum are reliable.
What are the benefits:
- no need for manual control;
- reducing the number of errors, inaccuracies and data loss;
- the ability to implement multilingual solutions with the help of smart contracts, standardization and tools of online translators;
- reduction in KYC process time.
Risk decentralization
How it is. The traditional KYC procedure is almost always carried out either by a specific company or by a
KYC service provider. In both cases, this means complete centralization of the process. That is, one structure decides what the test should be, it conducts it itself, stores the collected user data and selects how to use it.
This approach increases the risks:
- unethical and illegal use of data;
- hacker attacks (one server is easier to hack);
- phishing and DDoS attacks;
- human error.
How it will be with the blockchain. A system built on the basis of a decentralized distribution registry removes the risk of monopolizing control. The constancy of the data recorded in the blockchain and open source code make it possible to make sure that the rules of the game are the same for all participants and there are no “black inputs” in the program. Automation and standardization of basic processes limits and controls the degree of human participation (the blockchain records who did what, and this information cannot be deleted).
What are the benefits:
- protection against human error and fraud;
- the ability to automate key regulatory issues, such as risk assessment processes conducted by banks and insurers;
- reducing the risk of violation of the law by KYC service providers;
- reducing the likelihood of monopolization of the industry.
KYC data quality
How it is. In the existing client-server data storage system based on
centralized repositories, where all ecosystem participants are forced to constantly exchange personal information of users, there is a steady tendency to generate poor-quality data (errors, inaccuracies, inconsistencies, fake data, etc.). And this trend is increasing with the increase in the number of participants.
This is a direct consequence of the lack of uniform standards in the industry, as well as the fact that banks, companies, start-ups, government agencies and KYC service providers use different approaches to storing and transferring data, different communication protocols, API, platforms and data management systems.
How it will be with the blockchain. A KYC solution based on a decentralized distribution registry will allow you to create a system where data would be stored on one platform accessible to all. This will automatically lead to industry standardization and will make most interactions between participants unnecessary - there is no point in exchanging information if all of it is recorded on the blockchain, to which everyone has access.
What are the benefits:
- the quality of data will be improved (no errors, inaccuracies, inconsistencies, fake data, etc.);
- data security will increase (they will no longer be transferred from one participant to another several times a day);
- industry standardization will increase.
Communication and transparency
How it is. In a traditional KYC system, an ordinary person (user) does not control anything. He does not affect what documents and in what form he needs to pass for the
KYC procedure, and he, in fact, does not know how his personal data will be disposed of. Moreover, banks, companies and KYC service providers also cease to control the process after the data is transferred to other participants. The existing system is opaque and there is no control in it.
How it will be with the blockchain. The combination of an open source platform, which in itself is a source of truth, with smart contracts allows you to build a system of relationships where all participants will know the rules of the game and all participants will be sure that no one can break or circumvent these rules.
What are the benefits:
- increasing the level of participants' confidence in each other, as well as in the industry as a whole;
- eliminating the need for secondary verification or cross-checking processes;
- reducing the number of frauds (if everyone knows what you are doing, it is difficult to hide the deception and / or avoid responsibility);
- increasing the efficiency of reporting and communication processes (saving time and money).
Warning about suspicious activity
How it is. Despite the fact that business and the state are constantly increasing the costs of
KYC processes, they still do not have an effective tool for tracking violations of the law in this industry. Participants can falsify data, somehow dispose of them and circumvent the law in various ways. As a result, the increase in the incidence and size of money laundering and the financing of terrorism in the world (despite the tightening of the rules of KYC & AML)
How it will be with the blockchain. Thanks to a shared distributed ledger and smart contracts, the KYC process can be easily regulated and controlled by all parties. Any change or update of customer data will be monitored by the system, and if someone breaks the rules, it will become known to all parties.
What are the benefits:
- acceleration of the fraud detection process (the system can independently notify all interested parties of attempts to violate the rules, attacks on the platform, and the like).
Applications for KYC systems on the blockchain
KYC on the
blockchain can be useful for many industries, in addition to banks and other financial institutions. Many companies, organizations and
government agencies are vitally interested in knowing for sure who they are interacting with.
