KYC is a process by which banks obtain information about the identity and address of the purchasers. It’s a regulator governed process of performing due diligence for verifying the identity of clients. This process helps to make sure that banks’ services aren’t misused. The banks are responsible for completing the KYC procedure while opening accounts. Banks also are required to periodically update their customers’ KYC details. KYC may be a manual, time-consuming, and redundant across institutions. Sharing KYC information on Blockchain would enable financial institutions to deliver better compliance outcomes, increase efficiency, and improve customer experience.
Problems and Deficiencies
- Work wiped out collecting KYC information unnecessarily replicated by multiple institutions.
- Isolated view of consumers and their transactions insufficient to detect concealment.
- Uncertainty in knowing if implemented practices are sufficient.
Key Problem Areas and Solution Benefits
- Redundancy: Most large files use similar data and processes to verify an equivalent client. The solution benefit is to eliminate the redundancy documentations that got to be verified only once before the approval information is shared.
- Inefficiency: Manual and time-consuming process to collect and verify documentary evidence. The solution benefit is to extend automation where documents and approvals are digitized and may be verified without manual intervention.
- Lack of specificity: Requirements for due-diligence are often fuzzy, creating uncertainty on compliance to avoid legal sanctions.The solution benefit is to standardize process i.e. standardized, automated KYC processes sanctioned by the regulators.
The Idea Behind Blockchain and KYC
Each company has to verify your identity somehow, and it’s particularly important for financial institutions. From this ‘know your customer,’ or KYC protocols was the rise to assist companies to ensure they know who they’re doing business with. Typically, this involves an extended, drawn-out practice where certain documents are shown, and a few kinds of background checks or verification takes place.
KYC Blockchain Implementation
In the traditional KYC system, each bank will conduct its identity check i.e. each user is checked individually by an individual organization or government structure. Hence, there is a waste of time for checking each identity from scratch.
The blockchain architecture and the DLT allow us to collect information from various service providers into one cryptographically secure and unchanging database that does not need a third party to verify the authenticity of the knowledge. It makes it possible to form a system where the user will only need to undergo the KYC procedure once to verify his/her identity.
The process is as follows:
- For KYC procedure a user submits documents to one of the banks where he wants to take a loan or use another service.
- Individual participants are responsible for collecting personal data(banks, government agencies, companies, or users themselves) and stored in a decentralized network.
- The bank checks and confirms the passage of KYC if everything is normal.
- The bank is responsible for entering the data about the user into the blockchain platform, to which other banks, organizations and state structures have access. All parties can control and regulate the KYC process. The system will monitor changes and updating of the user data, and if someone breaks the rules, it will become known to all parties.
- When a user wants to use the services of another bank, this second bank accesses the system and thus confirms the user’s identity.
- The access to user data will be based solely on its consent. The user must log in with cryptocurrency transactions i.e. use the private key to initiate the information exchange operation.
Blockchain and KYC: Current Challenges
The KYC practices vary by the institution as there are no global standards. This leads to redundant work and limits the ability for different financial institutions to collaborate to verify identity. Customers are subject to time-consuming and difficult-to-accomplish onboarding processes when opening new accounts. There are changes in the regulations and this is creating costly and effort-intensive obligations for companies to comply. Also, the customer information is not being updated in material changes, which causes inaccurate information in many bank systems.