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using blockchain for KYC and AML

Before we talk any further about the topic of using blockchain for KYC and AML, let’s understand what AML and KYC are 

AML is the abbreviated form of Anti Money Laundering. KYC stands for ‘Know Your Customer’. Typically, AML comprises of a specific set of rules, procedures, regulations that administer and help cut down the chances of money laundering. The process of illegally obtaining money involving legitimate businesses and foreign banks. Various measures are being developed by people and organizations across the globe to prevent money laundering and terrorist financing. 

On the other hand, KYC involves the process of extracting the information about customers such as your identity, address and other details. This is done so as to prevent the exploitation of banking services for wrong purposes like terrorism financing, money laundering, etc. KYC is, in fact, an integral part of AML and (CFT). 

Who uses KYC and AML? 

AML and KYC are used as a standard by almost all financial institutions like banks. If any financial organization fail to meet the AML and KYC standards, they will be charged hefty fines. 

Why do banks require KYC and AML? 

Regardless of the type, all banks and financial institution has to necessarily maintain both AML and KYC to steer clear from frauds. Often, the entire process of KYC and AML happen to be too hectic for both the bank and the customer. The process begins with the customer having to bring the different identity proof documents to the bank. After which, the bank will review the documents and accept or reject it. The process is time-consuming and can take up to around 10-20 days. It also increases the operational cost as well.  

KYC is intensive, non-competitive, and highly duplicative. Especially when it comes to multi-national corporations that possess multiple banking relations in various countries. Thus, banks find it a nightmare reviewing the documents of the customers and verifying the backgrounds. This is because the document usually involves a lot of personal information.  

However, knowing all the information about customers can help the risk management team of financial institutions analyze and prevent any criminal activities, such as terrorist financing, money laundering, etc.

‘Identities’ and banks 

We know for sure that identity happens to be a burden for many banks as well as financial institutions. However, digitizing identity can help lessen the difficulty although it can prove to be quite expensive. Researchers suggest that over $1 billion are spent every year by banks and financial institutions on the identity management system which doesn’t solve the problem completely.  

This happens because disparate systems and technologies won’t be able to communicate with each other at most times. Convergence and disruption are of high importance to banks and financial institutions in the present world. In such a scenario, this can prove to be a serious threat. Thus, banks will have to think about cost-efficiently managing, and analyzing ‘identities’ twice before taking any action to better understand the clients’ requirements. 

Blockchain can help 

Banks and financial institutions can walk out of this situation with the help of blockchain. A distributed ledger where data is duplicated for users in real-time. Financial institutions can use blockchain as their foundational architecture to build applications. This will help provide their users with a platform where data can be digitally stored.  

As the data is duplicated across the network rather than centrally storing it on a device, blockchain allows information to remain safe. Often, banks ask users for their blockchain to identify data. Once it is shared, you will be allowed to log in using a one-time password (OTP). You will also be granted a private key to your data as well.  

Though the identity data can be sourced and managed by other parties. But it still remains entirely transparent. You will solely have the authority to distribute it to others. As it is self-sovereign, it is further protected from hackers and fraudsters.  

How will it benefit financial institutions? 

Typically, every bank and financial institution has to identify and build a low-risk profile for their customers. With the support of the KYC model, the blockchain will help minimize costs, thereby helping to present KYC utility and self-sustaining market leadership. As middlemen are often not a part of the process, banks can enjoy complete control over their customer data.  

Features of blockchain for KYC 

  • Using blockchain-powered KYC, banks and other financial institutions can gain control over end-to-end interaction. This means, there exist greater control, and reliability when accessing non-competitive data. 
  • Blockchain can be used to execute the operational. It control process through a hassle-free method.  
  • As human inputs are limited, banks and financial institutions get to experience better control, reduce regulatory risks. And maintain standardization across the industry. 

Blockchain can transform the way banks and other financial institutions function. It can simplify KYC and minimize operational costs. Additionally, it can also help complete more complex transactions and workstreams on a chain. In the future, we can surely expect to see more innovation in the Identity and KYC arena.  

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