- Identity and KYC
- Challenges to Financial Inclusion
- Why Blockchain?
- Applying Blockchain to KYC
- Blockchain and Self Sovereign Identity (SSI)
- How do Decentralized Identifiers (DID) Work?
- Blockchain Companies Providing KYC and SSI Services
Identity and KYC
Our identity is defined by data such as name, date of birth, nationality, passport number, etc. This information gives us access to services such as banking, voting, and property ownership. Because of its importance, identity data needs to be controlled by individuals and stored securely. In a perfect world, people should be able to prove who they are without having to rely on central authorities to assign them IDs and store information on their behalf. We are not here yet, but may soon be.
In order to prevent fraudulent schemes and identity theft in financial transactions, companies institute rigorous Know-Your-Customer (KYC) procedures. KYC assures that customer information is accurate – the customer is who they say they are. It can take weeks before information provided by customers is verified and validated. According to a 2017 Thomson Reuters Global KYC Survey, the global average time to onboard a new client was 26 days, which surpassed its previous average of 24 days in 2016.
The goal of KYC is to prevent criminals and malicious actors from using banks for money laundering or terrorist financing. KYC processes, however, result in additional financial and administrative costs for companies, especially smaller companies. KYC is also mandatory in complying with laws and regulations on Anti-Money Laundering (AML), doing business across borders.
Challenges to Financial Inclusion
Among the many challenges faced by financial inclusion initiatives is the difficulty in obtaining valid identification documents (IDs). In the Philippines, for example, IDs considered valid by most banks must be issued by the Philippine Government. Unfortunately, it is difficult to apply for a government-issued ID because most of the time, they also require another government-issued ID to vouch for a person’s identity. The process can trap those who find it difficult to acquire an initial identification card to a vicious cycle of finding a government-issued ID. People from rural and outlying areas find it difficult to access banking services since they may have difficulty in acquiring a valid ID.
Since access to banking services requires valid IDs, this restricts poorer people’s access to basic financial services such as loans, savings accounts, and investment accounts. According to the World Bank, a reason why three quarters of the world still don’t have a bank account is because of bureaucratic requirements involved in opening an account. This includes the barrier to entry caused by the difficulty in obtaining IDs.
Applying blockchain to identity management and KYC can speed up verification and reduce admin costs. It also gives individuals ownership over their identity.
To address this issue, the first consortium of banks in Southeast Asia began working with a government agency to apply blockchain technology in speeding up KYC. OCBC Bank from Singapore, HSBC Bank from the UK, and Mitsubishi UFJ Financial Group from Japan, in collaboration with Singapore’s Infocomm Media Development Authority (IMDA) are working together to complete their proof of concept (POC) for the first KYC blockchain in Southeast Asia. There are many other financial institutions turning to blockchain for KYC. Here, we will look into why they are so interested in tapping the blockchain for their KYC needs, and what firms are providing it currently.
There are several key features of blockchain technology that make it suitable for KYC: immutability, decentralization, security, and distributed ledgers.
Blockchain networks are made up of nodes that all receive digital copies of its distributed ledger. This ledger records details of all transactions made within the network. Entries are recorded chronologically and transmitted to all nodes. The network also validates all data entries before they are recorded. Entries are also linked. Because of this feature, it is very difficult to tamper with past data without also tampering with data in previous blocks and controlling the majority of nodes. The larger a blockchain becomes, this type of tampering requires unfeasible amounts of computing power.
No single person or entity controls the blockchain and no other governing authority maintains the platform. This feature makes the blockchain secure and resistant to censorship since the blockchain only needs its nodes to work together to keep the system running. It is very hard for a single party to take over the network.
Blockchain transactions are verified and secured using advanced encryption and cryptography. This ensures that unauthorized parties cannot access sensitive information.
All the nodes in a blockchain possess a record of all verified transactions, ensuring that there is no single point of failure that can be exploited within the system. This also makes consensus mechanisms possible, where network participants collectively verify and authenticate transactions.
Applying Blockchain to KYC
Blockchain-based KYC has been picking up. Abu Dhabi Global Market’s (ADGM) has shown interest in the technology. ADGM is an international financial center based in the United Arab Emirates and have reportedly completed a trial of a blockchain-based KYC application. According to ADGM, the trial revealed that blockchain has “radically simplified” the KYC processes since other institutions can easily share and validate KYC documentation about their clients in a secure environment.
A report from Goldman Sachs back in 2016 highlights many benefits for blockchain-based KYC. The report further adds that storing account and payment information on the blockchain could improve data quality and reduce the number of suspicious transactions in banking networks. They opine that it could generate around $3 – $5 billion in cost savings across banking institutions in the industry KYC services were put on a blockchain.
There are also other benefits for financial institutions such as unified storage of customer data, simplified verification, and better monitoring.
Unified storage of consumer data
Each customer can have numerous data points. Blockchain can unify data sources store a variety of information from different sources in a secure database. This enables faster and more efficient KYC verification. Data sources that are considered authoritative sources of information can build their own nodes that distribute information throughout the network. The decentralized nature of the network allows authorized third parties access to the data.
This setup also builds trust because an individual only has to submit personal information to a trusted government agency. It also eliminates the need for individuals to repeatedly provide the same information to multiple parties (e.g. banks or insurance companies). By requiring authorization every time a data is requested, this setup also prevents personal information from being distributed without the data owner’s consent.
Additionally, the consensus mechanisms that underpins blockchain networks allow financial institutions to verify basic information about their multi-banking clients, resulting in greater transparency and more effective risk management.
Simplified verification of customer data
KYC stores customer information in a unified storage space that is accessible by many authorized institutions. This ensures that financial institutions that need to perform KYC can easily verify customer data without having to go through third-party data verification services. Through direct access to primary sources of information and advanced cryptography, the tedious process of forensic validation (e.g. authenticating physical copies of identity documentation) is no longer necessary. This significantly reduces on-boarding time for clients without compromising data quality and personal privacy.
Blockchain’s chronological storage of information and its inherent immutability ensures that information can be easily audited. Additionally, it can be streamlined to automate compliance with local laws on data privacy and AML. In the future, the technology may even provide enhanced privacy features where an entity or individual need not access the data, but simply make request confirmation that a particular record exists and that it matches information submitted by a customer.
Because of distributed ledgers, individuals can create their own record and unique ID and securely store it on the blockchain. When changes to the network are made (e.g. change in marital status), nodes in the network are automatically given updates on client information.
Blockchain and Self Sovereign Identity (SSI)
Decentralized identities arguably creates of the greatest benefits of blockchain: giving people control of their personal data. People can take back full authority over how their information is stored and distributed, independent of any centralized registry, identity provider or certificate authority.
Decentralized Identifiers (DID) are new forms of identifiers established on the blockchain to help users prove their online identity on various digital platforms. Users have the freedom to create their own DID’s and maintain full ownership and control of it. Because it is decentralized, no central authority or institution is given the automatic permission to take over or manage a DID.
This gave birth to the framework of self-sovereign identity (SSI), a framework for the creation, management and interaction of digital identities. Through SSI, people and businesses can safely store their identity data on their own devices and distribute it only to those who need to validate it. This removes centralization of data through third-party identity providers and related risks of censorship, hacking, abuse and identity theft.
There are 4 pillars of Self-Sovereign Identity:
- Information source: this is where individuals and entities can keep their personal data. This can be their mobile phone, software wallet, cloud wallet, hardware wallet, or other forms of personal data storage.
- Decentralized networks: the entire architecture for SSI lies on the blockchain’s promise of decentralization, decentralized databases, and distributed ledger technology.
- Cryptographic key creation: This is crucial to the operation of SSI since it allows for the secure creation of a root identity that a user wants to store.
- Key management: This is a feature built on top of the cryptographic key creation meant to secure the access to identities.
How do Decentralized Identifiers (DID) Work?
DID is a series of code that hold important information that identifies an individual, organization, or object. Through advanced cryptography built on top of a blockchain network, a DID can be created.
Once a user creates their own DID, a certifier (a third party validator) verifies the identity claim. Certifiers may be any professional working in the field of law, accountancy, banking and finance, and public service. They receive payment for attesting and verifying identity claims. Then, a hash of the claim object will be stored on the blockchain.
Users can share their DID with institutions that require proof of identity. DIDs allow people control over which information can be shared, eliminating the need to go through a rigorous identification process which can sometimes be too invasive. DIDs can be accessed across various blockchain and web applications and can provide permanent and cryptographically verifiable account of an individual’s digital identity. Should users wish to destroy their DIDs, they can freely do so.
Blockchain Companies Providing KYC and SSI Services
Bloom is a standardized, programmable ecosystem to facilitate on-demand, secure, and global access to credit services. Its main service is to create a network of peer-to-peer and organizational credit staking. Bloom’s service has three main components: BloomID, BloomIQ, and the BloomScore.
BloomID is its identity and credit worthiness component. With BloomID, third parties can attest to the identity of another person, including their legal status and credit record. Attesting individuals can be the user’s friends, peers, or Bloom’s accredited third-party entities.
BloomIQ is its platform for credit history management. Its main purpose is to gather and collect information regarding a user’s credit history.
BloomScore is an indicator for risk valuation. This shows the likelihood of default for every individual based on their credit standing.
Bloom’s native token, BLT, is both a cryptocurrency and scoring enhancement mechanism of the network. It also serves as a voting token for Bloom’s governance. Accredited identity attesters and risk assessors are paid for their services in BLT.
Civic is a decentralized identity ecosystem for a secure and efficient identity data storage and management. Through Civic, users can create their own virtual identities and store them conveniently in their own devices.
Civic’s ecosystem pushes for a reliable, on-demand access to identity data which other entities can easily be provided with.
Its native token, CVC, is an Ethereum-based token that is used for payments.
Blockpass is an identity management tool built on the blockchain. Through SSID, it lets users store identity data and use it across various platforms. The platform also uses accredited verifiers through “trusted compliance platforms.” To ensure that no data is stored in the Blockpass system, users are given cryptographic codes which represent their data on the blockchain. Users only need to provide the Blockpass QR code from the app to provide to other parties.
Its native PASS token can be used as a means of payment and to access discounts on Blockpass services.
SelfKey is an identity management ecosystem on the blockchain. It offers user-hosted data storage which can contain every user’s identity documents and assets. These documents can be shared by way of public or private key mechanisms, giving data access only those given permission to view them.
SelfKey also allows reusable identity authentication with the help of its own accredited certifiers. When a user identity is authenticated and verified by the certifier, they can share the authentication credentials to as many providers as they want.
SelfKey gives its users a crypto-wallet that can store ETH, KEY, and other ERC20 tokens.
Its native KEY token is used for the purposes of payment and staking for network access.
Blockchain has brought a promising alternative to current methods behind KYC processes. Traditional methods of identity verification and identity information storage are not only costly, but also vulnerable to hacking and theft. This is an important consideration, especially when we’re dealing with highly sensitive and confidential personal identity information.
Legally mandated needs for rigorous KYC and AML processes also prolongs client on-boarding time by banks and other financial service providers. Often, the process of verifying identities have to be repeated each time a client processes a new transaction with different service providers.
Blockchain has taken advantage of features such as immutability and decentralization to provide effective and efficient identity storage and management services. By creating a secure decentralized storage option that cannot easily be altered, identity management tools on the blockchain can create high levels of trust and can help perform KYC more effectively.
The rise of decentralized identifiers have also created new possibilities for blockchain to be applied to other identity verification processes. DIDs give individuals full control over what personal information they want to reveal and with whom it is shared.
Ultimately, blockchain can help people to regain full control over their identity information in a way that is secure and cost-efficient — features that addresses common complaints against the traditional way of verifying identities.