Automated KYC in a blockchain environment as a concept

Know Your Customer (KYC) is a big part of any AML effort. Information such as name, social security number, birthday, and addresses can be very useful when determining whether or not an individual is involved in a financial crime.

At present, institutions offering these services follow time consuming, expensive and redundant practices for each new customer. With a decentralized system these practices can be more effective.

So, what does it mean to have a truly decentralized exchange?

A decentralized exchange is a global service without any borders, available to any member of the internet. Other salient features include speed and transparency.

Perennially running servers ensure transactions are validated instantaneously. The system is not labour intensive and cost of transactions is lesser than in a traditional system. Additionally, all transactions, codes and live software used to run the network are open for inspection, reproduction and improvisation.

Blockchain is a distributed database and verification system specifically for financial transactions. The technology uses a publicly-viewed ledger to record and keep track of transactions.

With both cryptocurrency and decentralized exchanges, digital money is fast becoming a reality that will significantly shape our financial future.

Blockchain in AML

Blockchain may be a good alternative to traditional regulatory reporting for AML. Institutions should also look to invest in technology that allows real time reporting to adhere to dynamic regulations set forth by various agencies. Suspicious activity regarding payment transactions, financial and lending activity, account opening and more, can also be effortlessly monitored and reported in real time.

The transparent nature of the system, also allows financial institutions and agencies to communicate promptly, leading to quicker actions against money launderers or terrorism financiers.

Why blockchain is perfect for KYC

Data security is the most important aspect of KYC. Information on the blockchain cannot be hacked or modified without leaving a trail of evidence.

In keeping with the EU’s 5th Directive, there is a growing demand for shared intelligence between various financial organizations. While a blockchain approach can simplify secure data sharing, it can also help monitor and update individual information more efficiently from anywhere. It eliminates the need for a centralized data server or network, thereby freeing banks of investing in data storage and protection.

Automation in KYC

While KYC programs may change rapidly due to updated regulations, they remain rigid in their overall structure. Since a checklist approach is followed in most countries, there is an easy solution in automation. Here are some KYC tasks that are viable options for decision engines:

  • Customer identification begins with the collection and validation of personal data from the client. Manual entry based on forms, is a time consuming process that can be more effective with automation. Creating CIP rules within the system will enable extraction from established ledgers within a blockchain.
  • Before creating a risk profile for new customers, AML staff have to research countless third party sources including sanctions lists, PEP lists and financial risk review organizations. Automating risk-based rules, can simplify the process and increase the scope of analysis when identifying risky customers.
  • After constructing the customer risk profile, automation can help in managing frequent KYC updates based on the risk category. This can include timely scanning of watch lists and other databases. Reporting can also be automated to a certain extent, but will require human touch points for finalization.

While automation can lower costs and maximize resources, technological advancements also enable flexible integration into decentralized systems. Since blockchain technology functions on shared, controlled and secure data, risk analysts and compliance officials can quickly access sanitized information.

By standardizing, automating and fully documenting the KYC process in a blockchain environment, firms can also noticeably reduce regulatory and compliance risk.

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