KYC and blockchains in 2021

On KYC and blockchains:

KYC is a challenge where blockchains are released. The premise is ‘KYC is a headache and there are blockchains’. However, there are rarely many details on the issue and information on why a blockchain is a good idea or not. In this post, I want to investigate this use case in more detail.

KYC

Know Your Customer (KYC) is a process that takes place in the financial services industry required by law.

For financial service providers, this means that you have a good idea of   who is providing financial services, whether individuals or businesses.

For individuals, the process of understanding and referring to the origins of wealth, business interests, and family ties vary, especially if they have politically active family relationships.

For companies, this means understanding the business, the structure of the entity, its history, directors and shareholders, and how it operates and earns money.

AML and CFT

Unlike KYC, Anti Money Laundering (AML) and Countering the Financing of Terrorism (CFT) focus on transaction-level cash flow standards to help criminals.

Banks will experience problems if they are caught moving money if the money is illegal or immoral (dirty money) or used for illegal purposes such as financing terrorists.

AML and CFT are primarily concerned with pattern detection and fall outside the scope of this article.

Blockchain

As a reminder, here is a brief introduction to blockchains that explains the technology behind blockchains.

the KYC problem

The problem is that KYC is expensive to join a new client and that each financial institution has to create its own KYC. Naming another entity and saying that someone else provided a KYC to this customer is unacceptable, so it is not necessary.

This means that financial services companies have a high cost to acquire customers, and it is a painful process to open a new account with a new financial services company every time.

I focus on the KYC of an individual, which is less confusing than the KYC of a business (sometimes also called Know Your Business KYB), but illustrate the same points.

The KYC process consists of several parts:

• Get personal information

tell me your name, address, and source of wealth

• Obtain proof of personal information

Prove your name, address, and source of wealth by showing me the documents

• Retention of personal information

So that we can show regulators what we know and that we can follow this process

• Background check, also known as CDD or Client Due Diligence

So that we can learn more about you and your experience.

• Continuous monitoring of changes for customers

So if you become a criminal, we can answer

Every new client of every financial institution has to go through the same process.

A pre-blockchain world

Before we talk about decentralization, we need to think about what can be centralized to create efficiency. Remember that in most countries it is legal for every bank to create its own KYC.

Personal information. Name, address, date of birth, marital status, passport number, national identity card, photocopy of passports, scanned identity cards (front and back), marriage certificates, birth certificates, etc.

This is the same static information and most of it does not change as often.

Can it be stored in a kind of national KYC database so that customers can access (and call back) third parties with the push of a button? Definitely.

Would that be better than the current situation? In a way, yes. However, there are a few things to think about:

1. User experience

Ideally, you log in to an online bank from a mobile or desktop, click a button, and enter a password or something like my login to my new Facebook sites. Then I will be presented with all my documents and information, indicating which documents I will submit to the bank. I click on “allow” and wait for the bank to decide whether I am a suitable customer.

Do I have to sign a piece of physical paper with a black pen and send it to the bank? Certainly not at the moment. Maybe a scan of my signature can be part of the dataset in the National KYC database and maybe it will be good enough. Note that I am talking about wet ink pen and paper signatures, not digital signatures. Digital signatures are much more secure than wet ink signatures, but they cause several problems.

Okay, I think the user experience can be improved with a national KYC system.

2. Banking experience

For the bank, this would be huge cost savings in terms of direct access to the relevant documents and not having to take customers to different parties. In addition, accounts can be opened faster, leading to faster deposits and faster revenue generation.

One of the costs banks incurs is mocking the original version, which mocks the efficiency of digital scans. Why is this so? Are originals much harder to forge than scans? No. If the KYC National Database can be used instead of the original document (supplementary), we increase efficiency.

3. Safety

After giving the bank access to my data in the national KYC system, I’m not sure what the bank will do with it. They will probably have to rescue you so that they can prove that they fulfilled their dedication mission. I don’t see how to get around this unless regulators are happy with an access record: “Look, you can see we got access to their information on November 9, but we didn’t send any information.” This is unlikely.

Security has therefore not been improved: with the addition of a national register, we have increased the number of entities with information about people. We also offer hackers another system, and the system is more profitable than it can be hacked because it has more data per person and more data than people!

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