Blockchain: identity revolution or evolution?
The blockchain: more than just transactions
“Bitcoin” and “the blockchain” are often seen as synonymous. But while Bitcoin has given us new meanings to money and mediums of exchange, it is the underlying technology, the blockchain, that may be one of the most important inventions of our time.
The blockchain holds a record of transactions with theoretically unlimited amounts of valued assets through its publicly distributed ledger, and this public distribution means this data is effectively is unforgeable. This gives it real-world implications — a recent report estimated that the technology could cut banks’ infrastructure costs for cross-border payments, securities trading and regulatory compliance by $15bn-$20bn a year from 2022.
The blockchain is often thought of as a way to record transactions, but it has other uses. It’s been touted as the perfect solution to many of the financial services industry’s problems, from capital markets to retail banking to payments. What’s less talked about is the potential for the blockchain to revolutionise the way we think about identity.
A financial identity crisis
Identity has been a tricky problem ever since we found it necessary to distinguish between friend and foe. Currently there are millions of disenfranchised individuals who cannot prove who they are to organisations. There are also millions worldwide who have forged identity documentation and may not be who they say they are. Financial institutions must, by law, be strict enough to catch those who have forged or stolen identities — a process that disenfranchises those who struggle to identify themselves.
Even if you are able to prove who you are, the processes to do so are built on paper-based systems. This is increasingly incongruous with our digital lives. We’re now so used to signing up to online services that having to stop and deal with paper seems like a step back into another world, like swapping a Prius for a penny-farthing.
The Know Your Customer (KYC) processes that financial institutions must put in place are there to stop criminals from easily funding illegal activity — drugs and terrorism are the reasons usually cited. But even with the vast amount spent on KYC processes and technology, money laundering is not declining. According to Cifas, the UK’s fraud prevention bureau, the number of bank accounts opened using stolen or fictitious identities actually doubled last year.
Costs are up, identity crime is up, and fines are also on the increase. Barclays was recently fined over $100m+ for customer due diligence (CDD) failures. Current KYC processes are broken.
How can the blockchain help solve this?
A distributed ledger would enable identity to be built up of individual uses of a person’s identity, be totally unforgeable and increase speed and ease of use for services. And an infallible ID system would mean a far better level of trust and convenience for both consumers and financial organisations.
Making this happen isn’t a quick or easy task. One way to get started would be for various global regions to begin issuing digitally authenticated birth certificates. Birth certificates and identities verified on the block chain would be unforgeable, time stamped, and publicly viewed for everyone to see.
The blockchain distributed ledger is strengthened any time some kind of identity evidence is presented. Open a bank account — that’s a link in the chain. Take out a mortgage — another link in the chain. A Facebook profile — another link. And so on: voter registration, driving licence, utility bills, and credit cards would all add links in the chain.
The more touch points where identity is presented that go in to proving the identity, the more secure it is. Building identity in this way means that everything you do is interconnected and because of its distributed nature, it’s almost impossible to defraud. Financial institutions can be sure of who their customers are thanks to this ledger, and criminal activity more easily traced by seeing where funds are going.
Revolution or evolution?
It’s hard to overstate the impact the blockchain could have on financial identity. Currently it’s possible for a regulated financial institution to make a payment to an unknown person. This would be consigned to the database of history.
It would also be possible to construct a ‘translucent’ blockchain system. Here the trading bank might not know who owns a particular wallet or account, but it would know for sure that another regulated financial institution does. An audit trail exists and regulators can find out if necessary.
Critical to success is making this system easy to use. This “distributed identity system” needs to be part of an easy to use scheme with straightforward adoption — otherwise no one will take it on.
The blockchain is not a complete replacement for current systems. It needs to be integrated into other technologies, and the information, or transactions, that are to be stored in the blockchain need to come from somewhere. It’s important not to see it as a magic solution — identity still needs to come from somewhere.
There is also the issue of blockchain fragmentation. There will be no single blockchain, but multitude. The requirement from financial institutions will be which blockchains to trust, and how they can integrate existing ID systems into this new structure. If this technology is to gain acceptance, then this is potentially the biggest issue that will have to be overcome.
If the blockchain is implemented correctly into KYC systems, it has the potential to make identity fraud and identity frustration a thing of the past — as well as drastically reducing the costs to financial institutions and eliminating the crippling fines they face.