Blockchain and KYC
Despite the fact that blockchain technology has not yet reached total popularity, its applications have been growing over the last several years. Cryptocurrency, for example, is a popular and lucrative investment for many people who are drawn to its decentralized nature, and now is the time to talk about KYC.
Users enjoy greater privacy when compared to traditional currencies because crypto is not controlled by a single entity such as a bank or government. Users, on the other hand, are still susceptible to electronic eavesdropping and data breaches.
The blockchain industry as a whole is now faced with several problems, including how to balance user anonymity with financial regulation requirements. This issue is particularly challenging since one of the primary reasons for blockchain’s popularity has been its data security. The identity of blockchain owners was kept secret by no government or institution.
Unsurprisingly, governments are concerned about how this anonymity affects financial systems. The United States and the European Union seek greater control over the blockchain sector. Some in the industry have chafed at the increased regulation and transparency, mainly as it has focused on Know Your Customer (KYC) standards.
As a result of worries about privacy, several clients have deserted blockchain central trading rooms and migrated to decentralized trading centers. Customers have abandoned central trading desks due to concerns over privacy.
Despite these drawbacks, blockchain and KYC may work well together. Some experts in the sector feel that incorporating KYC into blockchain platforms isn’t necessarily a bad thing. In fact, making blockchain more compliant might help it become more popular while also avoiding hefty federal fines.
KYC verification is an important tenet of financial services compliance. And the idea has already been embraced by cryptocurrency trading businesses. KYC and blockchain integration may provide a workable solution to increasing the popularity of cryptocurrencies while preventing unlawful financial activities.
The first stage in combating money laundering (AML) is known as Know Your Customer (KYC). KYC procedures are used to identify and authenticate a customer’s identity when a financial institution (FI) accepts a new client. Financial institutions may use these methods to evaluate the risk profile of their clients based on their likelihood to commit financial crimes.
Because there are no global standards for KYC procedures, the methods differ from institution to institution. This leads to superfluous labor and inhibits different financial institutions from cooperating to authenticate individuals.
Customers are subjected to time-consuming and difficult-to-fulfill onboarding procedures when creating new accounts. Due to changes in the laws, businesses are faced with expensive and time-consuming obligations to comply with.
Second, because the data is not being updated in material changes, customers are receiving false information in many bank systems.
In the old KYC system, each bank would conduct its own identity checks, such as by verifying each user separately by an individual organization or government structure. As a result, checking each identification again is a waste of time.
The blockchain architecture and DLT enable us to aggregate data from a variety of service providers into one cryptographically secure, the unchanging database that does not require a third party to authenticate the accuracy of the information. It enables us to create a system in which users only have to complete the KYC procedure once to establish their identification.
Purpose of KYC
KYC (Know Your Customer) is a requirement set by FinCEN (the Financial Crimes Enforcement Network) in the United States and by other regulatory bodies across the world. KYC entails financial institutions’ monitoring their customers for indications of illicit behavior. It’s part of an established anti-money laundering program.
Banks, investment firms, casinos, fintech businesses, and other companies that conduct a lot of financial transactions must do their homework and complete an identity verification procedure in order to obtain comprehensive KYC information from new customers and create standards for third-party transactions.
Deceptive financial transactions provide rogue individuals a leg up in their criminal enterprises. While it is understandable that clients want to keep their information private, sharing personal information with financial firms is also in the client’s best interests.
Many cryptocurrency transactions are currently an exception to the KYC requirement, but this situation may be damaging to the industry rather than promoting its growth. In reality, government regulations on cryptocurrencies will most certainly rise in the future.
KYC in Crypto
KYC/AML is currently in a state of transition. You may buy crypto without following KYC, but you might be better off using an exchange that is required to use KYC to protect your interests.
The most popular ways to get cryptocurrency without KYC restrictions are using decentralized exchanges and crypto ATM machines. You may also use peer-to-peer exchanges. However, the regulations for bitcoin are shifting, particularly in the United States. As previously said, FinCEN is now forcing cryptocurrency exchanges to comply with KYC standards and implement AML procedures in order to achieve regulatory compliance.
The European Union does not have the same stringent regulations as other jurisdictions. An exchange that solely offers crypto-to-crypto trades is not covered by specific legislation in the EU. In other cases, the EU does demand compliance measures. Requirements are still a global jumble.
Traders and buyers have long cherished their privacy and did not want to share personal information with cryptocurrency companies or the government. They may find KYC checks to be invasive and unwarranted during the onboarding process.
Even if it’s as simple as gathering basic information and a few seconds of waiting for real-time verification, requiring ID verification has an impact on the customer experience. Customers who deal with traditional financial and investment institutions, on the other hand, are frequently accustomed to KYC and AML processes and tend to them as having little significance.
For most people, the slight difficulty of FinCEN rules shouldn’t be a deterrent to crypto transactions, especially since parts of the sector already follow these laws.
The primary advantage of KYC checks for cryptocurrencies is that they prevent illegal activity such as money laundering and financing for terrorism. Because cryptocurrency transactions are anonymous, the industry is vulnerable to charges of criminality, which may be preventing some investors from participating.
The majority of customers want to be involved in well-regulated financial transactions. As a result, KYC checks may encourage more general users to invest in crypto. Furthermore, blockchain will be deterred from being used for illicit activities by bad actors.
Where do these technologies meet?
Because of the ban, companies in every sector will have to change their operations. Regulators are more likely to impose stricter rules, so businesses must anticipate these changes and learn how to improve blockchain technology.
KYC, for example, may help blockchain integration to exist in financial and commercial systems by strengthening it.
The increased ease with which large corporations may be audited and regulated could lead to a reduction in fraud, as well as other benefits. KYC can also be done more quickly, efficiently, and inexpensively by incorporating blockchain into the process.
Blockchain, on the other hand, might assist KYC by forcing compliance checks to become more thorough and sophisticated financial anomalies to be identified. The KYC process will have to become more technically sophisticated in order to accommodate the complexities of blockchain transactions.
When combining these areas of interest, it’s critical to work with KYC and AML compliance solutions that have a track record of working with blockchain firms and can automate KYC intake as well as authentication for existing clients.
Although blockchain’s advantages are not in contradiction with current KYC procedures, its adoption will take time.
Anonymity may not survive the contemporary push for more regulation, but permissioned sharing of certain consumer data might well be beneficial to the financial ecosystem and make it more attractive to sectors that have avoided blockchain thus far.
They may also come with accounting software that allows you to track client transactions and produce reports. Of course, customer data security must be maintained in order for businesses to remain GDPR compliant. It’s a difficult balancing act, but one that can be handled with the correct technology.