Blockchain Disruption in Finance: KYC/AML
While securities trading and settlements are the most commonly highlighted areas of blockchain disruption in the financial services industry, there are numerous other sub-sectors that the distributed ledger technology will impact. One of these areas is the KYC/AML process.
In this fourth article of the five-part Blockchain Disruption in Finance series, you will discover how the blockchain is disrupting the KYC/AML process at financial institutions.
Tighter KYC/AML Regulations
Know Your Customer (KYC) and Anti-Money Laundering (AML) processes play an integral role in client onboarding at financial services providers. Before a new client, such as a mutual fund, a brokerage company or an SME, can conduct business with a financial institution it needs to undergo thorough KYC and AML checks.
Know Your Customer (KYC) refers to the due diligence process of obtaining and verifying information about a new client’s identity, geographical location, line of business and whether they are regulated or not to ensure that only legitimate businesses are receiving banking services. Anti-Money Laundering (AML) refers to a set of rules, regulations, and procedures designed to curtail money laundering in the global financial industry to combat organized crime and terrorist financing.
The KYC and AML processes, therefore, go hand in hand to ensure that rules and regulations put in place by financial regulators in regards to who financial institutions can conduct business with are being adhered to.
KYC/AML regulations have tightened substantially since the 2008 financial crisis and heavy fines have been doled out to financial institutions that have been embroiled in money laundering scandals. This, in turn, has caused banks to dedicate more investment towards compliance systems and to increase the headcount of their risk and compliance departments.
Why the Blockchain Makes Sense for KYC/AML
The problem with existing compliance processes such as customer onboarding and AML procedures is that they are lengthy, cumbersome processes that involve paper documents, several sign-offs, and legacy systems that lack interoperability.
In light of the blockchain’s ability to securely record and store data in an immutable manner that can then be shared with permission third parties, it should come as no surprise that the distributed ledger technology that underlies the digital currency bitcoin is being hailed by many as the much-needed solution to big banking’s compliance woes.
All data stored on the blockchain can be readily available to view by risk teams as well as financial regulators, which means that account data, financial transactions, and lending activities can be monitored in real-time. This greatly facilitates the AML process as any dubious financial behavior can immediately be detected and reported to regulators and law enforcement.
Furthermore, client’s KYC data can be easily shared with other business units within a financial institution to increase the speed of client onboarding as well as streamline the entire KYC process through the digitization of all documents.
Blockchain-Powered Compliance Platforms in the Real World
Unsurprisingly, there are numerous blockchain startups, technology companies, and financial institutions who are working on developing blockchain-based KYC solutions for the financial industry as the technology is likely to play a major role in this area in the future.
Perhaps the most notable blockchain KYC project to date has been IBM’s phase one proof-of-concept for a new shared KYC platform, which was successfully completed in November 2017. According to the press release, the technology giant conducted the project in collaboration with Mitsubishi UFJ Financial Group (MUFG), HSBC, and Deutsche Bank. The aim of the PoC was to demonstrate that IBM’s blockchain-based shared KYC platform “provides a secure, decentralized and efficient mechanism for banks to collect, validate, store, share, and refresh trusted KYC information of corporate customers.”
The objectives of the new blockchain-based KYC project were to create standards for the collection and validation of relevant documents and information, the elimination of repetitions of mundane documentary tasks, to create a sharing economy environment open to all financial institutions and regulators, to digitize all corporate KYC information to preserve accuracy and authenticity, and to increase transparency and trust among all stakeholders, while still ensuring client confidentiality.
Furthermore, in February 2018, KYC/AML infrastructure provider Shyft announced that it will launch “an open and unified blockchain framework for the standardization of regulatory, compliance, and due diligence mandates for Know Your Customer (KYC) and Anti-Money Laundering (AML).”
The Barbados-based startup is developing a blockchain-powered platform that will enable users to securely obtain, store and work with compliance data to help them increase efficiency and reduce costs. To make this happen, the Shyft.Network will focus on digital identity.
“The Shyft Network aims to provide a new paradigm for digital identity. […] Shyft is a reputation network that enables base layer identity anonymization and KYC data-anchoring. Shyft assigns individuals and businesses with Creditability scores, defining their reputation, plausibility, believability, and likelihood that they are creditable. On the Shyft Network, creditability or reputation becomes collateral and user identities act as anchors on which bridges and gateways are created into new data sets that enable reputational creditability,” the company states in its press release.
Shyft Chairman Joseph Weinberg said: “Financial institutions are facing an increasing number of compliance obligations with heightened complexity and rigor, where failure to comply can result in significant legal penalties and reputational damage.”
Weinberg also believes that “the current processes used by financial institutions to handle regulatory compliance are broken and highly ineffective in stopping money laundering. Identity is being looked at in an improper manner and the industry is ready for a seismic change.” This is what Shyft is aiming to achieve with its new blockchain-based KYC/AML solution.
Blockchain technology is poised to change the status quo of the KYC/AML process as the technology not only enables more efficient and transparent client onboarding but also allows financial institutions to monitor clients’ financial behavior in real-time to potentially detect any attempts of money laundering.
Do not miss the last and final article in this series: Blockchain Disruption in Finance: Private Equity. I will publish it on Thursday, May 24. Enjoy the read!
