KYC Blockchain Technology is a world renowned concept now. It is a part of emerging technologies and has emerged since the inception of decentralized data storage. KYC is considered the backbone of every financial institution. So, it is made mandatory to record and present customer’s data for global financial safety. Anti-money laundering is an effort to mitigate Fincrime globally where FIs today are much more concerned than ever. According to a source, $1.2 billion has been spent on KYC since 2020 globally.
In this article, we shall discuss the technology which is believed to be facilitating the KYC process. Unlike blockchain technology, the KYC is a totally separate process and has its own understanding.
Introduction of Blockchain Technology
While moving towards the use of Blockchain in KYC, we need to know how blockchain technology works. Blockchain technology is an advanced database management system where data is shared with transparency. Likewise, KYC Blockchain is a trending concept where Blockchain technology is used to facilitate identification and verification processes. However, the KYC processes are becoming a nuisance and an irritatingly long procedure for customers. Similarly, blockchain technology has its own limitations, where the database is stored in blocks. This makes it difficult for Blockchain implementation in KYC as it is costly with being comparatively slow.
Is KYC Blockchain Centralized?
Mainly blockchain technology is considered a decentralized mechanism for data storage. Yet, it is also considered to be centralized as the data is monitored in a single location. But it is fully accessible to networked users as well. Hence, it is inherently not decentralized. Currently, the decentralized Blockchain is preferred everywhere due to the ease of access and being faster than centralized systems.
Undeniably, there are multiple problems in a centralized KYC system. Firstly, the KYC process is repeated multiple times, and the customers are irritated due to it. Hence, this repetition of the KYC procedure makes them hostile against the service they have rendered from the FI or bank. Financial service providers have their own specifications, and users need to provide details to every FI.
The following are the main problems in a centralized KYC process:
- Fraudulent data being overlooked or published by unidentified
- Unable to track customers
- Fake data entries that are not verified
- Slow processing of data
Therefore, these problems cause the cost of the process to rise beyond affordability. Still, the KYC processes are now being shifted to the Blockchain. Gradually, the process is becoming more efficient and faster than before.
KYC Blockchain Implementation
Relatively, Blockchain for KYC is a seamless but stepwise procedure. The customer’s data goes through different phases before it is stored and accessed. Particularly, in the case of blockchain, the process is much more systemized. Here’s how a simple Blockchain Implementation in KYC procedure takes place.
Data uploading on the Blockchain
- Customer data in the form of documents are uploaded for identity in the blockchain
- Bank executes the KYC procedure for verification and issues KYC compliance approval
- KYC compliance is also verified by another bank (if any)
- Data from both the bank's and customer’s side is uploaded on the blockchain
Customer’s authorization for KYC verification
- Customer A and Customer B allows the banks and businesses to verify their data via blockchain
- The businesses and banks cross-verify the uploaded information with the customer’s actual data through KYC.
- Thus, blockchain becomes the central hub for the KYC process to be executed, facilitating data storage.
Benefits of KYC Blockchain implementation
High Data Quality:
Data changes, updates and data modifications are monitored by actual entities in real time
Reduced Turnaround Time:
Blockchain technology offers decentralized data storage to KYC solutions. This gives Financial Institutions direct access to data saving their data collection and processing time.
Reduction in Labor cost:
Eliminating the paperwork and manual data management, Blockchain reduces the labor cost from the KYC process.
Multi-sourced data collection
Knowingly, as the blockchain decentralizes the KYC procedure, it brings distributed data collection in it. The decentralized network is easily accessible for parties after permission. Also, Blockchain offers efficiency in data security while eliminating unauthorized access.
Higher efficiency in KYC Blockchain
Since the database is stored and particularly permitted on networked blockchain, they provide higher efficiency. As Nikolaos writes in his book on Efficient & Accelerated KYC Blockchain process from which we have cited the above image. If we look into this diagram, we shall come to know that simplifying
The KYC/KYB process through efficient data management is better for all users.
Since blockchain is regularly updated, every time a KYC transaction is performed, the data stored will be updated. Whenever, there will be a discrepancy between stored and updated data, the system will be notified. Therefore, it is easier for the authorities to monitor updated data and take swift actions.
KYC Blockchain implementation as a one-stop solution
Presently, KYC Blockchain is embraced as a rapidly growing technology in KYC/AML. By offering speed, and cost effectiveness the Blockchain is used to digitize the KYC process to a whole new level. Certainly, blockchain technology cannot resolve all KYC issues. For example many backward countries still use hardcopy methods to collect users data for KYC. As KYC is now fully automated and hardcopy data access is difficult there, Blockchain will not be applicable in those countries. Also, the AI based processing needs much advancement to remove the existing loopholes in the system. But still none can deny the successful breakthrough in KYC using the blockchain technology.
Sources to the diverse and authentic information are mentioned below:
Primary Resource: Blockchain Technology for KYC: The Solution to Inefficient KYC Process
Secondary Resource: ForbesVeera Budhi, Advantages And Disadvantages Of Blockchain Technology, 20 October, 2022
Frequently Asked Questions
A KYC system utilizing Blockchain technology not only cuts down on expenses and time spent on onboarding, but also eliminates the need for customers to go through the process again when registering with a different organization. Furthermore, the encryption of stored data prevents unauthorized access without the customer's consent.
A Blockchain Transaction is basically done in 4 steps:
- Recording the trade or transaction in a record.
- Verifying the trade to ensure its validity.
- Adding verified and accepted transactions to a block.
- Once the block is full, it is linked to the chain
The existing blockchain technology allows for secure and unalterable identity management through the use of decentralized blockchain technology and biometrics, which ensures that only the individual can access their data.