Blockchain Technology, Digital Identity and KYC. Part I

Introduction into the concept of the KYC

Throughout history, identity has always been an important part of human interaction. By confirming an identity, individuals can gain access to privileged property such as a bank account or entrance into a building. The strong connection between identity and access/ownership rights have been abused by criminals who are able to hide or steal identities in order to access certain privileges. For example, a criminal might want to use someone’s identity to launder money from a bank. If the bank ever suspects anything, it would be impossible to identify the criminal and make him accountable for his actions. This risk makes it important for companies and institutions that govern access and ownership rights to correctly identify individuals. It has become a staple part of everyday business called Know-Your-Customer (shortened to KYC).

Development of the KYC through the History

Nowadays, due to the evolving market and digitalizations, criminals have become even more tricky in their activities. Therefore, it is vital more than ever before, that the correct identification is a necessity.

In the past identification and verification of the certain individual was only done in person and manually. Meaning that if for example, someone wanted to open their bank account, he/she would need to go to the bank, wait in line, then show their identification document, fill tons of papers etc. Everyone can agree that these days, this is completely unnecessary and time consuming, given the fact that we have modern technology such as the internet and that everything can be done digitally.

Why is KYC important?

If we could define the KYC with just one sentence it would be like this: “The role of the KYC is to avoid money laundering and other criminal activities such as Identity theft and Terrorist financing”. But here we come to the second part that is inseparable from the KYC and that is Anti-Money Laundering (AML). These two sets of regulations are closely related. AML refers to different laws and regulations from governments and international organisations that compete against Anti-money Laundering. Therefore AML is combating two important crimes and those are Money Laundering and Financing Terrorism.

It is also necessary to mention the Know-Your-Business-Partner (KYBP) process, which in the sense is similar to the KYC. KYBP is the process of verifying Businesses rather than individuals. The goal of KYBP is to identify fake companies in order to further combat money laundering.

How does the verification process work?

In order to comply with the KYC/AML obligations, Identification and verification of the individual or organisation will need to be assessed. Individuals will first go through the Customer Identification Program (CIP) where information such as name, date of birth, address will be collected.

How do organisations verify these credentials? There are a couple of ways to complete this verification. It can be conducted as a simple video identification or also through document scanning. There are even more complicated verification processes, such as the use of publicly and privately available databases.

After the identification and verification, individuals will need to be assessed based on the risk they possess. This part is also known as the Due Diligence. There are typically three Risk Levels (Low, Medium and High) that match three levels of Due Diligence (Simple, General and Enhanced) respectively. The higher risk, the more additional information needed and vice versa.

One of the tools that can be used to automate the KYC process is the Rule Engine. The Rule Engine can be defined as an application that works on the predefined logic to determine the Customers risk status and can manage the decision making process. A rule engine can simplify the Customers Risk Assessment process and automate Due Diligence process. Such a Rule Engine can be used in all stages of the Customer onboarding.

Can the KYC process be simplified?

At helix id, we also believe in a mobile first approach to the KYC process. Merchants have the possibility to digital onboard Customers in line with KYC/AML obligations.

During the onboarding process, Customers will be assessed based on their risk level and put in one of the above mentioned Due Diligence categories. For the Customer with the high risk level, they will need to be monitored more often after the onboarding, this process is known as the Ongoing Due Diligence.

Thanks to our use of Blockchain technology, we can give the whole process more security and auditability. Blockchain technology can be simply explained as a decentralised, distributed ledger technology that records transactions. It’s transparent and immutable features enhances the KYC process to give Merchants and regulators more confidence regarding KYC obligations.

In the follow up part we will touch more on the importance and benefits of the Blockchain technology in the KYC process. Additionally, we will also explain how these two subjects interact between each other.

To be continued…

Written by our two experts from the Legal Team of Blockchain HELIX — Nathan Vandy and Filip Djordjevic.