Against a backdrop of escalating costs, complex manual processes and increased regulatory scrutiny, financial institutions are required to critically evaluate their operating procedures and look to innovative technologies to retain profitability and ensure compliance with global regulations. This is why they are resorting to Blockchain in KYC & AML technology.
As a technology predicated on collaboration, Blockchain enables parties across the industry to come together to achieve a shared goal, without the need for intermediaries or paper trails to ensure trust. This simplifies and streamlines interactions.
Blockchain is a platform that supports multiple use cases within Financial Services, and it has the ability to transform a number of processes, including peer-to-peer payments, trade settlements, and supply chain tracking. One such use case being explored is in the area of Know Your Customer (KYC).
The benefits of Blockchain are aligned with industry attempts to solve the KYC challenges of: complex, inefficient processes; access to accurate data; and an increasingly stringent regulatory environment, all of which have led to excessive operational overheads and poor client experiences.
Ever-increasing anti-money laundering (AML) regulations, coupled with more aggressive enforcement activities have led many financial institutions to implement lengthy, expensive processes in a bid to remain compliant. These slow the pace of business and have had an increasingly negative impact on the client experience.
As a consequence of the complex regulatory environment and challenge of accessing quality public data, the collection and verification of client entity information is increasingly burdensome.
Financial Institutions have traditionally increased staffing as the mechanism for managing complexity in KYC requirements, but with large financial institutions reportedly spending on average $150m on KYC processes in 2017, this operating model is no longer sustainable.
Characteristics of Blockchain that make it advantageous technology
Records are given a unique ID and stored cryptographically in a way that ensures lineage and eradicates the opportunity to tamper with information without alerting the rest of the network.
Encryption through complex cryptography and obfuscation techniques ensures that clients maintain control of their sensitive information and can decide which parties are granted permission to access this information via access to the correct key.
- Shared ledger
Consensus mechanisms ensure that shared data is agreed upon, improving access to accurate information across the industry.
Any participant in the network can access a record, with the correct permission from the client. This is an opportunity for regulators to be nodes on the Blockchain and monitor information directly, ensuring compliance.
Blockchain enabled document exchange pilots
There has been significant collaboration across the industry, with fintechs, banks, data vendors and regulators working to pilot Blockchain solutions for sub-sections of the KYC process. Whilst many of these solutions will not solve all the KYC challenges encountered by market participants, they are effectively introducing the technology into the KYC space.
Governments in countries such as Estonia and Singapore are exploring replacing centralized registries with decentralized ledgers to create a trusted, tamper-proof repository of information on an individual, which spans multiple facets of their identity.
From a KYC perspective, digital identities provide the capability to automate the verification of an individual’s identity. They also enable the use of digital signatures, improve data quality and deliver operational efficiencies when on-boarding retail clients.
However, owing to the complexity of the identification requirements for corporate entities, there is a limitation on the application of digital identities in solving institutional KYC challenges.
A solution enabled using Blockchain in KYC & AML could be on the horizon, but the journey towards achieving it requires significant collaboration across industry participants and a number of hurdles to be overcome