As more and more banks and financial institutions are entering the blockchain era, KYC is taking center stage.
KYC or Know Your Customer is the mechanism to try to weed bad actors out of the financial sector. Terrorists and money launderers all love the anonymity of the blockchain. KYC is being introduced to deter them from using it.
In the fight against terrorism, it has been shown that cutting off their finances is far more effective than dropping bombs. With KYC, they are not able to access financial services. Likewise money launderers.
In this article, we will go over some of the ways KYC is being implemented and how it is affecting the blockchain.
How Does KYC Work?
KYC is not something that has only come about with the advent of the blockchain. After the terrorist attacks of 9/11, governments have started collaborating on a system to identify bad actors and cut off their access to money.
With the ability to buy and sell Bitcoin with the anonymity of the blockchain, it has become a much bigger issue as these actors have turned to using cryptocurrency to move money around. There has been more scrutiny on cryptocurrency by governments as a result.
Ironically, as media coverage has reported, it will be the blockchain that actually helps to implement KYC for financial institutions.
One of the problems is that it is very expensive to implement as there needs to be a lot of coordination between institutions. The blockchain will remove many of the repetitive actions that many times overlap. The process will be more streamlined across platforms and institutions.
The Blockchain Saves the Day
Many of the processes that get duplicated and repeated across different institutions are verifying identities multiple times. With the blockchain, the transaction is immutable, so the identification is more trustworthy.
Once the block is verified, there is no longer a need to continue to verify the identification.
IBM is already using a blockchain based KYC procedure to secure the process of identifying users.
What will likely happen is that there will be a company, or companies whose sole task is to identify people that will be using financial services. Then they will put all of those customers in their blockchain. Financial institutions will then be able to access the blockchain to see the identity of the user.
This will be a very efficient, streamlined and economical way to be sure the user is not one of the bad actors looking to use money for illegal activities. People who are not doing anything illegal will welcome the security of their data on the blockchain as it won’t be accessed without permission and only by the authorized entity. They will have greater control over their data without relinquishing any control for the sake of security.
Before the blockchain, it was very difficult to implement a true KYC process and it was actually quite easy for money launderers to move their money around. With the blockchain, hopefully we will see a massive reduction in the ability for criminal enterprises to do more harm.