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:
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.
Using blockchain, decentralised KYC offers several key benefits that can transform the way banks conduct their KYC today.
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.