Blockchain is a revolutionary technology which can improve the Know Your Customer (KYC) process and standardize your due diligence procedures.
The Know Your Customer (KYC) process is integral, as it requires applicable companies to undertake numerous validation and verification protocols of key documents as part of their due diligence procedure. There is an element of information sharing within the KYC process, so it is natural that there are several KYC utilities available on the market. However, these tools can take a lot of time and money to implement and maintain, and the due diligence process can sometimes stall for up to a month or more, leading to increased costs and rather unsatisfied customers. Blockchain is a new revolutionary technology that can help with aiding and solving this KYC dilemma.
Due diligence cannot be avoided
KYC or due diligence procedures are also sometimes referred to as Anti-Money Laundering (AML) obligations. These include tax compliance assessments and making sure that an interested client is not a politically exposed person (PEP), which are generally considered to be manual procedures for applicable companies to undertake. However, as with any manual process, these are very time consuming, expensive, and prone to human error. In addition, mistakes in non-compliance can incur a significant amount of financial and reputation costs for both parties involved in the due diligence process.
There has been an ongoing effort to try and streamline the entire KYC process, and Blockchain appears to be a suitable technology to apply in this regard. It should be noted that Blockchain applications are being used in many industries, such as within Banking which has a SWIFT Registry that consists of around 1,125 member banks who share KYC documentation. As such, the possible implications and impact of Blockchain on the entire KYC process could be very profound.
How can KYC benefit from Blockchain?
Apart from standardizing the due diligence process, there are other benefits that the KYC process can stand to gain from Blockchain. Firstly, this technology is centered around the sharing of information contained in ‘blocks’ which are stored in a ‘chain’. So, if a given customer makes a valid transaction, a record of this can be stored in a block, which also contains a reference to the previous block.
The efficacy of this stems from the fact that if this same customer completes a KYC process with another company, that information will be stored in a block and inserted into the chain which can be accessed by other applicable companies. Blockchain is very transparent when compared to other information sharing systems, as no single entity has the right to modify or erase a block without this being recorded on the Blockchain. This is a huge benefit in terms of transparency, as it means that data cannot be lost of erased.
Using Blockchain to create a digital identity
Another key aspect which is related to the KYC process is that of digital identity. Such a requirement has become an intrinsic part of today’s standard operations across many industries. Generally, an individual only needs to have specific documents verified once, as the company can then create a digital identity for that customer. This allows for transactions to be ‘signed’ by this digital identity.
Such a digital identity can also be used to access certain important information about a client, such as addresses and account details, which can also be used during the KYC process. Furthermore, companies can use this method to identify irregular transactions and then share this information directly with all companies connected to the chain. The benefits of creating digital identities using Blockchain include a better overall customer experience, reduced operational costs, increased security, and better transparency for regulators.
Risk cannot be underestimated
Despite all the potential benefits of applying Blockchain technology to the KYC process, there are some risks as well. One of the first items to keep in mind is the fact that only relevant information is shared with the applicable companies, so questions of data protection may arise. This is essential as customers, companies, and regulators need certain assurances that customer data privacy is placed at the forefront.
Another key risk is that a decentralized and anonymous P2P network is still vulnerable to being somehow hacked. Albeit such attacks are extremely complex and rare, the possibility still exists, which is a source of concern to many customers that would have sensitive information potentially available to such third parties.
Blockchain is still in its early days, so an industry-wide acceptance of this new technology is still a distance away. As such, it could take some time before we see such applications becoming mainstream. However, the fact that certain individuals within reputable institutions are assessing the possibility of applying Blockchain to the KYC process is highly promising.