Advantages of Leveraging Blockchain for KYC
Any organizational domain that deals with managing customer data have been at their wits end trying to ensure compliance with the regulations of KYC (Know Your Customer) — from financial institutions to telecom companies and more. KYC has been adopted by mostly all of the customer-facing organization. Its main advantage is that it helps the organizations know and understand their customers better, thereby helping them manage their risks prudently. KYC has been gaining momentum and has become increasingly important globally to prevent financial fraud, identity theft, terrorist financing, and money laundering.
KYC is more than just collecting and verifying customer documents. It also helps verify customer’s antecedents, thereby determining the risk of engaging with the customer, creation of the customer’s expected transaction pattern, and monitoring it against expected behavior. Having said that, one of the most important paradigms for KYC checks still remains the basic identity and location check.
But, the irony is that in the current system, there’s no sure shot way for any enterprise to ensure that not only their customer data is correct, but is updated and a single version of truth exists within the organization. This is precisely where enterprises are since long trying to solve synchronizing the KYC data within the organization, with some successes using a singular repository. But the challenge is in getting different systems of an enterprise refer to one single repository’s data for validation, consistently.
Now, if we broaden our scope, we’ll realize the obvious — these disparities in customers’ data are present across different enterprises also. Here as well, the enterprises have tried to find a solution by forming consortium and creating a centralized repository to validate customers’ antecedents. Organizations like SWIFT, whose messaging n/w connects an array of banks, have come forward to use its network of financial institutions to help in creating such a singular repository of documents and information. While these are good ways to ensure the sharing of information and bringing unanimity into the picture, there are also costs involved and willingness of different parties to participate in such initiatives — after all, there always exists a threat of monopolistic behavior.
Providing such a platform would require solutions to adhere to the following tenets:
● Single version of truth
● Immutability
● Security
● Consensus
● Cost-effectiveness
Enter: Blockchain.
Blockchain is a well-renowned technology that provides solutions to all the above tenets. In addition, Blockchain offers possibilities of having different solutions built on the same platform. For the issues mentioned, maintaining a single version of truth for both intra- and inter-enterprise, solutions can be almost similar in implementation.
The solutions will revolve around a blockchain and a vault working in tandem. The primary stakeholders will have access to the same through a well-defined access control protocol. The stakeholders mentioned here in the context of the intra-enterprise system scenario will be different application software, whereas, for an inter-enterprise system, the stakeholders will be a consortium of financial institutions who are collaborating and sharing information of customers for mutual benefit.
The modus operandi of the solution — a KYC document and other related information is stored in a vault and a reference for this document is stored on the Blockchain network. The access to the doc is through an authentication routine that’s built in the Blockchain application code itself. Only an authorized participant of the Blockchain can thus access the document based on the permission provided. A hash of this document is stamped along with the reference in the Blockchain which helps any participant to validate the document’s immutability. In a permission Blockchain, we have the ability to restrict the level of access for different participants.
Summarizing the benefits discussed so far. Blockchain offers:
● Single version of truth: Blockchain offers a single version of truth which is maintained across participants in the consortium
● Customer-controlled and completely anonymous
● Decreased costs and increased revenue: Offering a single repository of documents, Blockchain helps reduce costs of data maintained across different establishments.
● Better encryption and tighter security.
● Servicing external institutions at a cost.
How does Blockchain technology fare with sensitive data?
Over 4 Billion sensitive records have been exposed in 2019 alone. Data breaches, hacks, leaks come to light every day, making it clear that our current approach to managing sensitive data is broken.
Blockchain technology offers an innovative approach which puts the individual back in control of their personal data, and relieves some of the data management burdens from businesses. More specifically, it’s the Zero-Knowledge Proof (ZKPs) which allows users to provide vital information without sharing any data.
If ZKPs are able to fulfill their potential, they can massively reduce the amount of sensitive data that is shared between corporations and individuals. We never know, 100 years from now, it may be possible for businesses to operate in an entirely compliant manner without actually storing and accepting any personally identifiable information
But, here are some major challenges:
Legacy systems architecture:
As of now, organizations have various applications software that support different applications. Almost all these systems have a module for managing customer data, which is referenced by the rest of the modules of the system. If we synchronize these internal modules to Blockchain, data will continue to be the biggest hurdle in bringing the single version of truth.
Consortium agreeing to share information:
Participants of the consortium may be concerned in terms of managing the blockchain, influencing a participant or a group, and sharing data on a single platform.
Designing the blockchain solutions:
To be honest, Blockchain is still in infancy — especially in terms of creating large enterprise applications having a lot more complexity. Designing solutions on Blockchain will require organizations to integrate their enterprise application, and that too with great care in terms of flawless handshakes, security, and solutions to auto correct error postings to Blockchain.
In conclusion
Summing up the discussion so far, Blockchain definitely shows a great promise for solving issues related to maintaining a single version of truth of the enterprise’s data. Further, this capability can be leveraged properly to address the ever long-standing compliance issues of KYC. Provided the current capabilities of the Blockchain platform, a good handshake with the enterprise software coupled with cleverly designed solutions can help address the KYC compliance needs, and help leverage Blockchain for KYC.
Blockchain’s capabilities are ever-increasing and newer technical solutions are being worked on day and night, by different Blockchain solutions providers/creators. In light of this, it is possible that we may have a much simpler approach to solving the KYC compliance issues in the future. One thing is sure, technologically speaking, things are only going to get better (and easier) from here, if Blockchain is implemented correctly.
