The potential of blockchain technology to reshape financial processes has gained widespread recognition in an increasingly digitalised economy. In this second half of our two-part series, we take a look at how banks can adopt blockchain technology through decentralised Know-Your-Customer (KYC) as a transformative solution for identity verification and the challenges that may come with it.
Decentralised KYC: Where is the industry at now?
The adoption of blockchain technology in various sectors, including the financial services, has paved the way for transformative solutions. Globally, central banks from Bahamas to Singapore have explored blockchain technology through the pilot adoption or issuance of central bank digital currencies (CBDC). Regulators have also shown support for leveraging blockchain to transform the provision of banking services, with notable use cases in trade finance and digital bonds trading. Likewise, several global banks have taken their first steps in adopting blockchain for KYC, i.e., decentralised KYC, through proof of concept (PoC) initiatives.
Examples where financial institutions (FIs) have adopted decentralised KYC:
The positive response from the industry and successful pilots suggest that more banks will embrace decentralised KYC as a transformative solution.
The growth of decentralised KYC solutions is particularly prominent in Asia, where blockchain technology is well received by the population and conducive environments exist for fintech innovation particularly in Hong Kong, Singapore, Thailand, and Vietnam. Further fueling the high growth are stronger regulatory tailwinds in data privacy and protection, and the commitment from FIs to improve the efficiency of their KYC processes in a future-proofed manner – and hiring more KYC analysts or subscribing to more centralized KYC utilities is not a sustainable solution to address a compliance challenge without creating additional operational problems. With rapid and continuous advancements in blockchain technology, decentralised KYC solutions are expected to become more sophisticated, compelling FIs to embark on this transformative journey.
The challenges with adopting decentralised KYC
The path towards the widespread adoption of decentralised KYC, however, is not all clear and rosy. While there is high potential for decentralised KYC to address some of the key shortcomings of existing KYC processes, challenges loom ahead and will need to be addressed for the solution to gain traction:
- Significant investment: Decentralised KYC essentially flips the equation for how KYC is conducted by FIs. For the solution to realistically be implemented, substantial resources, a large network, and strong industry influence are required to cover the breadth and complexity. This means much of the progress depends on the extent of which leading industry players are willing to invest.
- Economies of scale: One of the core premises of decentralised KYC is the employment of verifiable and reusable KYC credentials, which relies on a concerted effort between members on the blockchain to accept and implement. A consortium approach is thus necessary to consolidate and align key industry players around the use case to maximise efficiency against the significant initial investment required.
- Cross-border and regulatory implications: Even with the buy-in from the industry, major institutions operate globally and not all jurisdictions have the same regulatory support for adopting blockchain technology or provide the technological infrastructure that would facilitate a large-scale roll-out. Furthermore, regulators today still have reservations about the concept of zero-knowledge proof identity verification, which, at first view, seemingly conflicts with the principle of conducting KYC. There are also potential conflicts between the application of blockchain technology with certain requirements from legal frameworks such as the General Data Protection Regulation (GDPR). As a result, early adoption of decentralised KYC may be limited only to certain jurisdictions and business lines within each institutional group.
Despite these challenges, decentralised KYC has set off new ways of thinking around how we approach KYC today. Several pilots have proved that decentralised KYC holds promise for addressing the inefficiencies and escalating costs associated with current KYC processes, while improving compliance to regulatory requirements and enabling a better experience for customers.
It is widely agreed within the industry that KYC today is a complex challenge and is often heavily associated with operational and commercial friction. Any attempt to leverage blockchain technology in this Web3.0 digital world to solve today’s KYC challenges is certainly worth a shot, because each marginal improvement contributes to technological and regulatory developments that will have far-reaching implications for the financial services industry in the future.
As blockchain technology continues to revolutionise the financial markets and beyond, decentralised KYC offers a path towards a more efficient, compliant, and customer-centric approach to financial identity verification.
