KYC Blockchain:Why it's a Good Verification Solution
Why KYC Is a Good Verification Solution
Blockchain enables the automation of know-your-customer (KYC) processes by using smart contracts. Smart contracts are self-executing contracts programmed to run automatically when certain conditions are met. This eliminates the need for intermediaries and reduces the potential for errors and fraud.
Blockchain-based systems can enable more efficient and secure cross-border transactions. By verifying the identities of clients or customers using a decentralized blockchain platform, businesses can reduce operational costs.
What is KYC Blockchain?
KYC is a process that allows businesses to verify the identities of their clients or customers. Traditionally, KYC processes have been time-consuming, expensive, and prone to errors. However, with the emergence of blockchain technology, KYC processes can now be streamlined, automated, and made more secure.
The Modern Definition
Government-issued identification documents, such as driver’s licenses, social security cards, passports, etc., make establishing one’s identity quick and painless. Even so, verifying the legitimacy of additional identification documents presents a significant obstacle. Furthermore, recurrent cases of financial fraud, money laundering, and other similar events have been attributed to security weaknesses in such systems.
The cost to governments and financial institutions worldwide in the fight against financial terrorism and money laundering has been enormous. With the current climate of uncertainty, volatility, ambiguity, and complexity in the financial services sector, blockchain solutions are increasingly being looked to for assistance with KYC requirements.
The financial services industry has been looking for ways to solve the “identification problem” for quite some time. Still, the blockchain is the first technological advancement that has made it possible to implement a practical KYC process.
Blockchain, a decentralized computer architecture, enables data consolidation from numerous authoritative service providers into a single, immutable, cryptographically secured and authenticated database.
Blockchain-based KYC verification has the potential to outperform current methods in several respects.
How does it work
An institution, such as a bank, sends a request for access to your identity information to the blockchain platform.
With this new system, users’ permission would be required before any data could be accessed. A user’s approval can be granted with a login, likely with a One-Time Password (OTP) and the assignment of a private key to the information at hand. Users’ data is still theirs even though the bank can now access it.
IT behemoths like IBM are already putting the idea of a KYC platform based on the blockchain into practice. The Shared Corporate Know Your Customer project aims to establish a reliable, decentralized system for verifying, collecting, storing, updating, and sharing data.
What Is the Purpose of KYC?
The purpose of KYC is to verify the identities of clients or customers and assess their potential risks to prevent money laundering, terrorist financing, fraud, and other financial crimes. It is a legal requirement in many countries and industries, including banking, finance, and cryptocurrency.
It is designed to ensure that businesses only transact with legitimate customers who are not involved in criminal activities. The KYC process typically involves collecting and verifying personal information such as name, address, date of birth, and identification documents such as passports or driver’s licenses. This information is then cross-checked against government databases and watchlists to ensure the customer is not on any regulatory or sanctions lists.
Where Crypto Technology and KYC Intersect
More rules will likely be put in place; therefore, professionals in the field should prepare and learn how they can help blockchain evolve. For instance, KYC requirements can facilitate blockchain by allowing its incorporation into existing monetary and commercial infrastructure.
On the other hand, blockchain can aid KYC by requiring it to improve its verification processes and ability to identify complex financial abnormalities. Due to the intricacy of blockchain transactions, KYC will need to adopt more cutting-edge approaches.
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How Can Blockchain Help with KYC Verification?
Distributed user data collection
Adopting blockchain technology to manage the KYC procedure would result in disseminating this information throughout a decentralized network, making it accessible to authorized third parties.
Better data security is another benefit of this blockchain-based system, as it will need confirmation or approval from the appropriate authority before granting access to any data. This will reduce the possibility of hacking and give users more control over their information.
Automation and standardization of policy/operations
With recent advancements made in KYC policy standardization and the ever-increasing amount of data being collected, it is now viable for blockchain solutions to utilize smart contracts for the execution of control and operational transactions.
The routing of KYC workflows can be codified into smart contracts and standardized across industries to improve efficiency. If the blockchain-based KYC system can decrease the need for human scrutiny in this way, it will be more efficient.
Centralization of controls and risks
AML risk rating processes undertaken by banks can now be automated thanks to blockchain technology, among other major regulatory concerns. As a result, the risk that banks are exposed to will be reduced.
Thus, using KYC AML blockchain systems can significantly alter financial companies’ perspectives on customer identification and authorization. A lot of money will be poured into blockchain-based KYC and AML solutions in the coming years.
Governance and data quality
Financial institutions use a siloed system with the existing client/server data storage model. This means the information is saved on the banks’ servers until required.
A blockchain-based system would enable the construction of a shared public ledger, enabling all users to access the information. So, anyone with the proper credentials might have access to the data. As a result, data governance would improve, which would in turn aid institutions in spotting fraud more quickly. This would aid in the prevention of many of the financial crimes that banks confront today and help them avoid the substantial fines that arise from compliance breaches.
Communication and transparency
Blockchain-based KYC solutions may actively monitor anything from new accounts to regular transactions. These novel platforms will notify banks of any wrongdoings when used in tandem with smart contracts that will have predetermined criteria to recognize fraudulent behavior and the like.
Blockchain’s immutability is handy when establishing trust between parties in a KYC procedure. If you use a KYC blockchain software solution, you can rest assured that your data is secure, and never again will you need to go through the tedious process of double-checking or other validation procedures.
Last but not least, a distributed ledger system streamlines reporting and communication to help you save time and money. Having access to reliable data and processes makes it much easier to spot errors and fraud.
Suspicious activity reporting
The current KYC procedure in the banking industry might take many days or weeks. The sector is racing to keep one step ahead of those who would commit financial fraud or terrorist acts, which is driving up the expense of maintaining regulatory compliance for financial institutions.
KYC procedure might be readily adjusted and monitored by all stakeholders using a shared ledger where multiple financial institutions are maintaining the ledger. It would be possible for everyone to see any new or updated information regarding a client.
Comprehensive authentication process
Due to blockchain’s decentralized nature, the possibility of fraud is significantly reduced. If the device were to be stolen, a hacker could obtain some private data, but due to the blockchain’s immutability, they would be unable to alter any of it.
Banks in particular can benefit greatly from KYC solutions since they improve both security and customer happiness.
Advantages of Blockchain in the KYC/AML Process
Distributed data collection
By using a blockchain, KYC processes can store data on a distributed ledger that authorized users can access. Since data may only be accessed when the users have granted permission, the system provides effective data security by preventing unwanted access.
Better operational efficiency
With the help of capabilities such as an exceptionally secure digital procedure and the sharing of user information on a permissioned network, the amount of time and effort required for the beginning phases of the KYC process can be considerably reduced. As a consequence of this change, the length of time necessary to onboard a new customer is cut in half, and the expenses associated with maintaining regulatory compliance are significantly reduced.
Validation of information accuracy
The decentralized KYC procedure is a time- and effort-saving method of acquiring access to accurate user information. Because of the immutability and transparency provided by KYC blockchain solutions, financial institutions can verify the accuracy of the information stored on the blockchain. This reduces the time and effort often spent on data collection by an organization.
Real-time updated user data
A distributed ledger is updated every time a KYC check is made at a bank. Our blockchain-based KYC system ensures that all participating institutions are always up to date by notifying them whenever there is a change in or addition to the underlying papers.
KYC Blockchain – The Scope of Application
It’s not just banking firms that can use KYC blockchain technology. Industries that need reliable user identification have a greater range of potential uses for this technology. Several sectors, not only financial institutions, may have access to the KYC register on a blockchain. For things like checking IDs before giving membership cards, etc., many of these smaller businesses and groups need access to this information.
It could also be used to streamline administrative tasks by tax officials. The court system, credit bureaus, stock markets, and similar institutions all rely on information gleaned from user registries.
Blockchain for KYC Use-Case Matrix
Here’s a use-case matrix for how blockchain technology can be used in KYC processes:
||KYC processes require verifying a person’s identity, which can be time-consuming and difficult to authenticate. Blockchain technology can provide a secure and immutable way to verify an individual’s identity through digital identity solutions.
||Decentralized Identity (DID) solutions can be implemented using blockchain technology. DID solutions can store identity credentials and verification records in a tamper-proof manner, ensuring that the identity data cannot be modified or falsified.
||KYC processes require sharing of sensitive personal information between different organizations, which can be risky due to the possibility of data breaches or misuse. Blockchain technology can enable secure and decentralized data sharing between different organizations while ensuring data privacy and security.
||Blockchain-based data-sharing platforms can be used to securely share sensitive KYC data between different organizations without compromising data privacy or security.
||KYC processes require continuous monitoring of customer data to ensure compliance with regulatory requirements. Blockchain technology can enable continuous tracking of compliance records in a tamper-proof manner.
||Blockchain-based compliance tracking solutions can be implemented to ensure continuous monitoring of customer data while maintaining data integrity and immutability.
||KYC processes can be time-consuming, and customers often face lengthy wait times and delays during onboarding. Blockchain technology can streamline customer onboarding processes and reduce wait times by enabling automated verification of customer data.
||Blockchain-based KYC solutions can automate customer onboarding processes using smart contracts and digital identity solutions, reducing wait times and improving customer experience.
||KYC processes require auditing and accountability to ensure that regulatory requirements are being met. Blockchain technology can enable auditing and accountability by providing a transparent and immutable record of all KYC activities.
||Blockchain-based audit trails can be implemented to provide a transparent and immutable record of all KYC activities, ensuring compliance and accountability.
Overall, blockchain technology can provide a secure, transparent, and efficient way to manage KYC processes while maintaining data privacy and security. However, it’s important to note that implementing blockchain-based KYC solutions requires careful consideration of regulatory requirements and data privacy concerns.
How EvaCodes May Be Able to Assist
When it comes to blockchain technology, the knowledgeable team at EvaCodes can help. Fill out the form below to have one of our technical managers get in touch with you and discuss the basic specs you’ve provided for your blockchain solution.
Existing KYC procedures do not truly conflict with the advantages of blockchain technology. While the recent push for additional KYC regulations threatens anonymity, the permissioned exchange of some consumer information may prove beneficial to the financial ecosystem and make blockchain more acceptable to sectors that have so far shied away from it.
Naturally, businesses must secure their customers’ personal information to comply with rules like GDPR. It’s not easy to keep everything in check, but with the correct resources, you can.
Frequently Asked Questions
1. What are good examples of blockchain KYC use cases?
A growing number of KYC blockchain software solutions are powered by blockchain technology. Currently, blockchain-based ID authentication solutions are being developed to help banks shorten the time it takes to conduct the necessary ID checks. Medical information can also be kept electronically, and there are various options for buying a house.
2. Can blockchain be used for KYC?
Blockchain ledgers are the best option for KYC checks since they cannot be altered. If a person’s information is checked and double-checked before being added to a blockchain KYC system, there is no way for the information to be changed for fraudulent reasons.
3. Is KYC the best use case for blockchain?
One of the most promising applications of blockchain technology is KYC systems. However, cross-border payments will likely be the most widespread application.
4. What is KYC in crypto?
It is a regulatory requirement for businesses operating in the cryptocurrency space. It refers to the process of verifying the identity of customers before allowing them to use a platform or service. KYC is intended to prevent money laundering, terrorist financing, and other financial crimes.
COO & Co-founder
Written by Vitaliy Basiuk
COO & Co-founder at EvaCodes | Blockchain Enthusiast | Providing software development solutions in the blockchain industry