Identity fraud remains a pervasive threat, enabling illicit activities within the global financial markets. To safeguard against exploitation and hefty fines, financial institutions (FIs) must prioritise Know-Your-Customer (KYC) measures that are suitable for today’s digital landscape. In the first article of our two-part series, we explore what decentralised KYC is, and how the adoption of blockchain-based decentralised KYC can bring about several benefits to FIs in identity verification.
It is well-established that identity fraud is one of the most common methods employed by bad actors to siphon and launder money through the financial markets. Several market studies have shown that in 2022, banks worldwide suffer losses of USD 500,000 and incur operational, regulatory, and legal costs of up to USD 2 million due to identity fraud alone.
To counter this, FIs need to pay extra attention to KYC, but most today still face immense challenges and costs in implementing effective and efficient KYC processes. One main reason is that FIs are still relying heavily on intermediaries such as centralised databases or KYC utilities to verify their growing customer data that are stored in-house. This leads to a multitude of problems for FIs:
- Cumbersome and repetitive client experience as each customer must manually update the same set of information with several FIs continuously throughout their relationship with each institution
- Lack of a single source of truth given multiple data points with both the customer and various centralised databases, which increases the risk of data inconsistency, operational inefficiencies, and high ongoing maintenance costs
- Heightened regulatory risks in data inaccuracies and potential data breaches associated with storing increasing volumes of customer data amidst tightening data protection regulations globally
Introducing decentralised KYC
Although the emergence of Web 3.0 has brought about an increased susceptibility to fraud, the premise of data sovereignty and encrypted digital identities in blockchain technologies have also built a promising use case for FIs to adopt decentralised KYC in combating new-world financial crimes while addressing current challenges.
Blockchain technology offers a solution for FIs to establish trust and transparency through secure, immutable, and verifiable KYC credentials. By leveraging blockchains in decentralised KYC, customers will fully own and control their data with the ability to instantaneously and securely provide FIs with consent-based access. FIs will also benefit with a more efficient method of verifying customers without having to rely on intermediaries, eliminating the growing risks associated with storing customer data. This presents a win-win situation for both customers and FIs.
The benefits of decentralised KYC
Using blockchain, decentralised KYC offers several key benefits that can transform the way banks conduct their KYC today.
- Security: The proof-of-work mechanism in blockchain technology results in a tamper-proof and secure way of storing and sharing sensitive customer data or KYC credentials. This removes the opportunity for bad actors to manipulate data for illicit purposes such as identity fraud and allows for quicker detection of suspicious activity.
- Efficiency: The reusable nature of verifiable KYC credentials allows for zero-knowledge proof identity verification (i.e., to verify identity without revealing the underlying identification information itself). This supports an ecosystem between FIs to eliminate intermediaries and cryptographically verify KYC for the same customer, thereby providing an improved customer experience by replacing repetitive KYC with a simplified and more cost-effective approach for FIs.
- Perpetual KYC: Decentralised KYC leverages the power of smart contracts in the blockchain to enable a consent-based information push mechanism as opposed to a conventional pull request from FIs. This is because customers can broadcast new information or changes to the relevant FIs on the blockchain based on the new hash function, enabling an effective adoption of perpetual KYC.
- Data privacy: With verifiable KYC credentials being stored in the customers’ mobile wallets rather than with each FI, individual customers will own and control who has access to their data, and how much, which is a growing demand from customers. This will also reduce the risk of a major data and confidentiality breach through a single point of attack on an FI that holds a reservoir of valuable customer data.
The adoption of DKYC using blockchain holds tremendous potential for FIs to address the risks and challenges that they face in the current KYC landscape. Embracing DKYC can allow FIs to establish trust, enhance security, and streamline the verification process, all while ensuring data privacy and reducing the risks associated with storing customer information.
With blockchain’s tamper-proof and verifiable nature, FIs can revolutionise their KYC practices while safeguarding their operations, protect customers’ identities, and contribute to a more secure and efficient financial ecosystem.
