Although recent moves toward the regulation of ICOs and cryptocurrency transactions have met with resistance from those participating in blockchain, the implementation of know your customer (KYC) and anti-money laundering (AML) processes will be critical not only for the growing blockchain token economy, but also for financial markets.
Currently, KYC and AML processes are time-consuming and expensive. It typically takes 30–50 days for standard KYC checks to be performed, and this process is duplicated by every institution. The system is inefficient at the front end, offers few long-term advantages for any individual attempting to engage in transactions with multiple parties, and offers few real-time opportunities to prevent fraud or criminal activity (particularly when otherwise accurate client information is used to support criminal activity).
Blockchain use cases for KYC and AML processes
The core technology behind blockchain — distributed ledger technology, or DLT — offers many benefits for both KYC and AML. As a publicly viewable ledger used to record transaction data, distributed databases provide transparency, efficiency, and security: information recorded on a blockchain, once verified, cannot be changed, only updated.
By providing access to a single KYC record, blockchain technology would ensure that every organization dealing with a client would have access to the same information. It would thus be easy to identify any discrepancies in client data, and distribution of encrypted updates to that data could be carried out efficiently and in near real-time. Institutions would also have access to all documents and compliance activities relating to each client.
Having been verified once through this type of KYC process, clients would then have access to have a digital identity. This would authorize any future transactions they might perform and verified information could become a “digital signature” with many usage applications in fields such as finance, health, and government.
DLT can also be used in AML processes. Because the ledger combines all data into a single platform, it removes the restrictions inherent in siloed systems, where institutions, and even divisions within institutions, can access only certain data. With improvements in communications, data quality, and data governance, institutions can conduct real-time monitoring and reporting. This gives them the opportunity to identify fraud earlier and be proactive, rather than reactive, in dealing with financial crimes.
Obstacles and advantages for institutions and investors
There are several challenges and opportunities in providing efficient blockchain-based KYC/AML solutioning:
- Validation: Incumbent active bank-grade KYC data verification needs to be leveraged in blockchain verification (which all too often relies on passive acceptance of documentation).
- Liability: Can well-designed blockchain KYC and AML solutions provide continuous “verified” information about a client to minimize the risks of fraudulent transactions? * Privacy: using DLT means that data collected as part of the KYC process would be available to every institution using the blockchain, including those that may not have formal relationships with each other.
- Standardization: for different attestations to be repurposed for subsequent transactions simultaneously, standard protocols must be established.
- Trust: While trust in any new solution may be a barrier, assuming there is proper implementation, the blockchain ledger provides immutable KYC and AML records.
As cryptocurrency and ICO funding efforts move increasingly towards mainstream markets and seek investment from traditional sources, the industry requires compliant oversight. KYC and AML are central to this new economy. Providing effective solutions that leverage DLT architecture is critical.
As Diana Adachi of Pegasus Fintech has stated, “KYC/AML will allow companies to identify who their investor is and reinforce any representation by the investor that they are qualified accredited investor under a separate and distinct accreditation review.”