KYC on blockchains may sound futuristic, but since Satoshi’s 2009 paper and the invention of Bitcoin, it could be the solution that changes everything.
We reached out to Victor Wong, CPO & Co-founder at BlockApps, about his insights into the many issues surrounding blockchain KYC solutions.
Victor Wong, CPO & Co-founder at BlockApps
Hesitations Exist When Implementing KYC Processes
Many cryptocurrency users place high importance on privacy and anonymity, and gathering personal data might jeopardize both.
Worries exist about the data gathered during KYC procedures, which could get misused or vulnerable to data breaches and have repercussions.
The beautiful thing about storing data on blockchains is that they are virtually unhackable and prevent unauthorized access via permissions.
People who want to engage in blockchain-based projects may find it hard to do so because of KYC requirements.
Individuals could be reluctant to divulge their personal information or lack the required paperwork to complete the KYC procedure, which might restrict their access to blockchain applications.
KYC on Blockchains Solve Many Problems
Several factors support identity verification on blockchains. KYC helps to establish confidence between customers and blockchain-based platforms, which could encourage greater adoption of the technology, a plus for adoption. It can also assist in preventing illicit activities such as money laundering and terrorist financing, which is a crucial factor for regulators.
There are many perspectives on identity verification on the blockchain. While there are worries about the hazards connected to KYC, there are also a lot of potential positives, such as improved security and regulatory compliance.
Finding a balance between privacy and security is difficult for the blockchain sector.
It’s also critical to ensure that user entry barriers are not raised unnecessarily by KYC procedures.
Victor Wong, CPO & Co-founder of BlockApps, notes,” The blockchain world has almost a split personality about KYC. For example, all major exchanges require some level of identity verification when opening an account. With many blockchains, however, there was this idea of being pseudonymous — which isn’t quite the same as being completely private but doesn’t link your individual identity to your personal information. This split has existed in the blockchain world for a long time. That second piece is where the perception of hesitation around KYC in the blockchain world comes from, as privacy around user data is oftentimes a concern.”
Related: Blockchain for Good: The Power of Blockchain Technology in the Humanitarian Sector
Blockchains Offer Several Use-Cases
Cryptocurrencies such as Bitcoin and Ethereum are examples of digital assets stored on blockchains where people trade them to facilitate safe and open transactions.
Additionally, tokens can stand in for a wide range of assets, including real estate, stock, commodities, or even time or attention, which can get issued and exchanged.
Smart contracts are self-executing contracts with some agreement conditions explicitly put into code are also another option. They automate many procedures, including supply chain management, insurance claims, and real estate transactions.
Blockchain technology can build and administer decentralized digital identity networks that let users own and manage their identity data while preserving anonymity.
“When we talk about identity verification, we’re not talking about individuals as much as we’re talking about businesses. If you think about how businesses in the real world operate, they need to know the counterparties that they’re dealing with at all times. That business requirement exists in every industry, whether it be agriculture, energy, finance, resources, or anything else. By enabling businesses to be verified on the blockchain, they can use all the advantages of the technology, such as greater transparency, trust, reliable data, and more coordinated activities,” Wong said.
He continued, “Once proper identity verification is in place, that means any asset a business needs to demonstrate the value of can be put on the blockchain. Let’s take an agricultural asset like beef as an example. Being able to put that asset on the blockchain and share it across multiple verified parties — its medical history, vaccine/antibiotic records, where the livestock has been, what it has eaten, etc. — helps drive transparency and value for consumers in what’s become a really competitive market.”
Related: 5 Uses For Blockchain’s that are Not Currency Related
How KYC Implementations Work
Businesses use KYC processes for identity verification and assess risk assessment, including compliance with relevant laws and regulations. The exact process can vary depending on the specific industry, company, and country, but here are the general steps involved in a typical KYC process:
Customer identification is the first step and involves collecting basic customer information, including names, addresses, dates of birth, government-issued IDs, and so on.
Customer due diligence allows businesses to perform activities to assess the risk associated with the customer. This involves screening customers against various databases and lists to check for criminal history or financial sanctions.
If some customers present higher risks, businesses may perform enhanced due diligence, which involves gathering additional information, such as the source of their funds or the nature of their business activities.
Verification of information provided using various methods, such as comparing the ID document via facial recognition, checking documents, or phone calls, gives an accurate picture of profiles.
After the initial KYC process, businesses may need to monitor activities actively to detect any suspicious behavior or changes in risk level.
KYC processes ensure that businesses work with legitimate individuals who pose an acceptable level of risk and prevent illegal activities.
Wong said, “In this case, we’re talking about the ability to verify that a business is who they say they are. That’s sometimes referred to as “know your business” or KYB processes, requiring that someone verifies individual customers and businesses. However, this user data around transactions wouldn’t be held on the blockchain itself. Businesses are identified by name, but individuals are associated with a username. So there’s the business identity verification piece that’s of high importance, but personal information associated with the identity of individual users is not being made public.”
While KYC is an essential regulatory requirement for many businesses, it can also present several challenges.
Businesses must keep up with changing laws and regulations to be compliant because of the ever-changing regulatory environment. Failure to comply with regulations can cause costly fines, legal action, and reputational harm.
Besides being resource- and time-intensive, KYC procedures can increase significant costs for firms. This is true for companies with sizable customer bases or large transaction volumes.
KYC procedures also depend on precise and current data. Verifying customer data can be difficult, especially for companies with operations in several jurisdictions and clients with complicated ownership structures.
Criminals may also evade KYC checks by using stolen or false identities, leaving firms open to fraud. Processes that implement KYC must be able to spot and stop fraud.
Difficult KYC processes can irritate clients, which might cause a bad customer experience. They might also decide to move their business elsewhere or stop taking part in the onboarding procedure altogether.
Data breaches and cyberattacks can cause the theft of sensitive consumer information and are a danger associated with gathering and keeping client data.
Related: How Do Scammers Entice Their Prey?
Wong iterated, “The lack of verified identities or KYB processes has prevented many businesses from coming on board, to begin with. Many businesses that operate blockchain organizations — like exchanges or other companies — must implement their identity verification processes to onboard customers and build their trust. So, having it as a core feature of the blockchain removes a lot of the barriers to blockchain entry.”
As business processes in the blockchain community continue to evolve, KYC implementations may vary. That said, standards are critical to ensuring a safe operating environment and satisfied customers who are safe and secure, knowing that personal information remains out of the reach of bad actors.
The benefits and prospects of effective KYC processes provide a way out for everyone.