KYC and AML Blockchain use case

There have been several incidents in the recent past that have prompted over and over again the need for an amplified, robust, and highly efficient system of security in terms of banking and finance. Crimes related to the above have increased like never before. They are as frequent and small-scale as duping and forgery, to as serious and lethal as money-laundering and massive terrorist attacks aided by duplication of identity. The current times mandate the urgency of having a system that allows banks and other public organizations to regulate and monitor with more efficiency the processes of verification and identification of customers and clients, no matter from which corner of the world. One very good example of achieving the above is KYC.

What is blockchain KYC?

As one is well aware, the KYC (Know Your Customer) norms require every customer of a bank to verify his identity by submitting acceptable proofs, as mandated by the respective bank, organization, or government. Usually, this includes a legitimate proof of identity and one for a residential address. Thereafter, there is a sequential procedure for procurement, tracking, and maintaining storage of huge chunks of data related to each customer for timely updates, monitoring, and efficient handling.

Blockchain for KYC

It seems to be a very doable job, even without any complex technological systems such as blockchain KYC and with simple, less-efficient databases. The real catch is that with the world turning into a global village, international transactions are every day, if not every-minute affair. People settled away from their families and made transactions daily for personal affairs. Businesses that function as multinational corporations or cater to international customers make a huge number of cross-border transactions daily. With the social media leap, many people cater to international audiences, often for paid services. Huge chunks of data from every corner of the world are flowing every minute and need regulation and monitoring, lest some illegal or criminal activity crops in.

This is where the urgent requirement for a platform that can help in the management of huge chunks of data without compromising on efficiency or security comes into the picture, and the answer lies in blockchain.

Combining the Best of KYC and Blockchain

With KYC emerging as one half of the solution for the above issue, blockchain is undoubtedly the necessary complement to it. While KYC assures customer identification and admission and safe regulation of banking and finance activity while minimizing the risk quotient, it fails to provide the necessary standardization for application to a wide number and variety of banks. At the same time, it can have a negative impact on end-user relationships because of its stringent regulations and reduced transparency. This is where blockchain KYC steps in with its guaranteed efficiency and security despite improved transparency.

Decentralized KYC

The biggest advantage of blockchain KYC is the power of decentralization, and this is what is making financial organizations take a keener interest in the technology for problem-solving. Besides, because the network functions as a distributed ledger in the public domain, every user has a particular cryptographic key for access and interaction. Banks have the option of going with either a public or private blockchain, and the difference lies in the sharing and control of data either internally or across multiple institutions. 

How does blockchain-based KYC work?

The technology combines the best of KYC and blockchain, and the procedure takes into consideration the best of both. Initiated by the verification of documents submitted by a new customer on the ecosystem, this data is uploaded on the blockchain network by the respective bank. As soon as this is done, automated cryptic updates are enabled by the ledger, even when data is amended or appended in the future. Because of the blockchain, the data can be accessed by authorized signatories as per requirement, while the customer is provided with a secure and unique verification mode for future transactions. 

Merits of the blockchain KYC system 

As is already clear from the above elaboration, the system is smooth, secure, transparent, and efficient, thanks to the blockchain KYC it uses. Besides these, there are other advantages this system provides, which are: 

Speedy

This mechanism can be a game-changer because of the minimized turnaround time the procedure would take, thereby ensuring efficiency for institutions. Besides, the lesser time taken, the more hassle-free the procedure would be.

Efficient data monitoring for AML

Any fixes or modifications to data, either requested or directed, can be handled with ease due to better monitoring and amendment means. This ensures reduced scope for forgery and misuse of data, which are certainly expensive to users as well as banks. Besides, the blockchain allows better governance of data now that they are stored homogeneously, again improving security against money laundering (Anti-Money Laundering or AML) better.

Standardization

If there was one issue KYC couldn’t solve, it was standardization. Blockchain protocols ensure this caveat is worked upon and a homogenous platform is created for all transactions and related data.

The future of the blockchain KYC 

Implementation of blockchain technology with KYC is not something new these days, with quite a few companies and organizations beginning to follow this approach. KYC Chain and Cambridge Blockchain, for instance, have worked on real-world products, and these programmed models are available as trials for implantation and witnessing their function. The primary aim is to convince or rather attract banks and institutions to take up the model, even if on a trial, and see for themselves if common issues revolving around regulation and monitoring of important data can be solved. 

Blockchain in financial services

Blockchain in financial services models can prove extremely useful for countering terrorist activities that usually begin by carving a path into financial institutions through fake identities for the procurement of data and money. The combination of the two can also prove to be cost-effective in terms of the process, while at the same time fulfilling the number one priority when it comes to banking: security. Without a mention, interoperability between multiple institutions becomes easier—a compelling argument to put forward for continuation in the field.

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Advocate Rahul Dev is a Patent Attorney & International Business Lawyer practicing Technology, Intellectual Property & Corporate Laws. He is reachable at rd (at) patentbusinesslawyer (dot) com & @rdpatentlawyer on Twitter.

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