Vee Finance, a decentralized finance platform, has officially confirmed its hack on Avalanche. On September 20, the hacker managed to transfer funds worth $35 million. In terms of assets, it was 8804.7 ETH (around $26 million) and 213.93 BTC (around $9 million). According to the report, the stablecoin was left untouched. As for the hacker, the report confirms that they have not yet transferred or processed the funds. The team is working to provide more details of the incident. Further,…
Why do we need KYC/AML?
Know Your Customer (aka KYC) is the regulatory and compliance obligation for the conventional banking and financial system to capture customer information before onboarding and providing any financial services. In banks, KYC is embedded into the account opening forms, which mandate customers to provide accurate information and ideally update as soon as any change occurs in the KYC data.
Similarly, other financial institutions such as Stocks, Mutual Funds, Insurance companies, etc. also require KYC information from their prospective customers. Primarily KYC helps financial institutions prevent identity thefts, money laundering, terrorist financing, and profiling and eliminating the runaway creditors.
In today’s global economy, we live in a world where users are in full control of their identity and are the sole authorizer to whom they may share their information. Know-Your-Customer has become pivotal in the digital world, and large financial institutions need to identify ways to trust foreign banks and have more transparency into recipients’ profile.
The Flaws in the System
Irrespective of the use case’s severity, establishing identity through Know Your Customer or KYC verification is a prolonged procedure. In addition to huge amounts of paperwork associated with undertaking such procedures, a lack of transparency regarding the use of the personal data collected from customers has led to inefficiencies in collating data between parallel systems.
Conventional Banking and Financial institutions spend a substantial part of customer acquisition costs on operating resident and isolated KYC databases and keeping them updated and accurate. KYC’s overall cost increases due to a lack of transparency, poor control, mistrust, and data duplication. Not to forget the fact that KYC related compliance has to be done every time a person enters into a relationship with another institution. There is little to none interoperability among institutions to share KYC-related data.
Solving Compliance through the Blockchain
Blockchain technology allows for creating a distributed ledger that is then shared with all users on the network. This means that blockchain databases have an inbuilt immutably that makes the data that they contain far more trustworthy. If the financial services sector, for example, implements blockchain for KYC verification, they will verify users quickly and reliably via an app, etc. Due to the reliability of blockchain databases, government institutions and companies could completely rely on the data, which would remove the need for further ID checks.
With a blockchain-based infrastructure, we can develop a unique self-sovereign decentralized Know-Your-Customer (DKYC) model. This model can help enhance customer privacy through consent-based access, featuring regulator governance. It can also help banks to use trusted and accurate customer data while reducing customer acquisition costs.
The open areas for research are: to address challenges such as fraud protection using artificial intelligence, creating the devices’ identity, dApps application models, on-chain/off-chain oracles, performance throughput, and the blueprint for decentralizing score-based KYC.
Everything from the immutability of blockchain databases to their ability to improve customer identification transparency will massively help improve the process and reduce fraud.
Government bodies will also benefit as risk officers will have better access to data, so the relationship between the financial and regulators will be more transparent. This provides the provision for a massive reduction of financial fraud and crimes in the long term.
KYC Blockchain Project – KYC-Chain
With a little research, it can be found that most countries follow a similar KYC/AML framework, all taking its roots from either the European or the American standard of compliance. Currently, most organizations have an inefficient system of asking for KYC/AML documents separately each time a new customer comes in.
The KYC-Chain project is an “all-in-one workflow solution to verify your customers’ identities, streamline a KYC on-boarding process, and manage the entire customer lifecycle.” Built on the blockchain, KYC-Chain forms an innovative solution to the age-old verification problem. It has packages that serve both the individual as well as the organization. As of April 2020, KYC-Chain has been involved in about 500,000 on-boarding verifications and covers about 200 countries.
With the help of KYC-Chain, organizations can out-source their compliance processes to an automated process. KYC-Chain can also be used for interoperability, meaning that once individuals finish the KYC process, they do not have to do it repeatedly. They can share their KYC-Chain credentials.
KYC-Chain also supports biometric authentication, cloud storage, APIs, Auto data extraction, and myriad other services, all of which are secured by the blockchain.